HSBC Holdings has agreed to pay $101.5 million to resolve federal fraud charges stemming from the bank's misuse of confidential client information for its own profit, a practice commonly known as front-running.
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In documents filed Thursday in Brooklyn federal court, HSBC admitted to using confidential information in two instances for its own profit.
In one March 2010 transaction, it converted approximately GBP5.3 billion ($7.4 billion) to U.S. dollars for a client -- identified in court documents only as a financial-services company -- that resulted in a $38.4 million profit for HSBC. In a second transaction in December 2011 for Cairn Energy PLC, an Edinburgh-based oil-and-gas company, HSBC converted about $3.5 billion to British pounds that resulted in a roughly $8 million profit for the bank.
Front-running typically involves a trader jumping ahead of a client's order, buying or selling for their own account to profit when the larger transaction moves a price.
A related federal probe into foreign exchange-rate manipulation led to the conviction of a former high-ranking HSBC executive and charges against a second one.
As part of the proposed resolution, the British bank entered into a three-year deferred-prosecution agreement with the Justice Department and agreed to pay a $63.1 million criminal penalty, continue to cooperate in investigations and prosecutions, strengthen its compliance program and pay back $38.4 million in gains. The bank had previously settled for about $8 million with Cairn Energy.
The agreement must be approved by a judge.
Such agreements, a common tool in the U.S. in corporate prosecutions, give the alleged wrongdoer a chance to cooperate with prosecutors in exchange for a less-punitive outcome -- typically a fine, admission of wrongdoing and taking measures to improve compliance. Under such agreements, the company is charged but criminal proceedings are suspended as long as conditions of the agreement are met.
HSBC said in a statement it has strengthened its controls and would continue to make more changes. "HSBC is committed to ensuring fair outcomes for our customers and protecting the orderly and transparent operation of the markets," spokesman Rob Sherman said in an email.
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