“My Watch Is Off”: HSBC Traders Used Code Words To Trigger Front-Running Trades

According to prosecutor Carol Sipperly, former HSBC currency trader Mark Johnson used just four words to trigger a massive, international front-running operation that netted his firm some $8 million in illicit profits: “my watch is off.”

The bank’s former global head of foreign exchange alerted the traders around the globe via a phone call in December 2011 that was recorded, a prosecutor said Thursday. The gambit was designed to take advantage of a $3.5 billion client order to buy sterling, the U.S. says.

 

After Johnson’s trial recessed for the day, prosecutor Carol Sipperly asked that the jury hear the recordings on Friday, in which Johnson allegedly tipped off a trader in Hong Kong. That signal eventually reached others on both sides of the Atlantic, she said. Johnson was in New York that day, speaking to Stuart Scott, the bank’s former head of currency trading in Europe, who was in London, just before the transaction for its client, Cairn Energy Plc.

 

Prosecutors say Johnson and Scott, along with other traders, bought pounds before the transaction. Johnson is on trial in federal court in Brooklyn, New York, accused of a scheme that produced a $8 million profit for his bank.

 

“We actually have Mark Johnson telling Stuart Scott ‘Tell Ed my watch will be off,’” Sipperly said. “We have communications where the word ‘watch’ is used, and then within seconds, 20 seconds of ‘my watch is off,’ we have all that trading that’s been described. The word is instrumental in getting the information to the traders when it comes to their early front-running trades.”

Here is Mark Johnson on his way to court in New York…ironically sans watch.

HSBC

For those who haven’t followed this particular story, Johnson was arrested roughly a year ago at JFK airport in New York after a nearly 3-year investigation into efforts on the part of several large investment banks to rig FX markets.  Per Bloomberg:

Mark Johnson, HSBC’s global head of foreign exchange cash trading in London, was taken into custody at John F. Kennedy International Airport Tuesday and is scheduled to appear before a judge in federal court in Brooklyn Wednesday morning, said the people, who asked not to be named because the case hasn’t been made public. He’s charged with conspiracy to commit wire fraud, the people said.

 

According to Bloomberg, Johnson’s arrest comes more than a year after five global banks pleaded guilty to charges related to the rigging of currency benchmarks. HSBC, which wasn’t part of those criminal cases, in November 2014 agreed to pay $618 million in penalties to U.S. and British regulators to resolve currency manipulation allegations. HSBC, which still faces investigations by the Justice Department and other authorities for the conduct, has set aside $1.3 billion for possible settlements, according to an August filing.

 

Rob Sherman, an HSBC spokesman, and Peter Carr, a Justice Department spokesman, declined to comment.

According to the original DOJ complaint, HSBC was selected by Cairn Energy Plc to execute a foreign exchange transaction – which was going to require converting approximately $3.5 billion in sales proceeds into British Pound Sterling – in October 2011.  But, before executing that trade, he tipped off a bunch of HSBC traders who loaded up their proprietary accounts with Pounds just before the massive trade sent the currency higher.

“As alleged, the defendants placed personal and company profits ahead of their duties of trust and confidentiality owed to their client, and in doing so, defrauded their client of millions of dollars,” stated United States Attorney Capers.  “When questioned by their client about the higher price paid for their significant transaction, the defendants wove a web of lies designed to conceal the truth and divert attention away from their fraudulent trades.  The charges and arrest announced today reflect our steadfast commitment to hold accountable corporate executives and licensed professionals who use their positions to fraudulently enrich themselves.”

 

“The defendants allegedly betrayed their client’s confidence, and corruptly manipulated the foreign exchange market to benefit themselves and their bank,” said Assistant Attorney General Caldwell.  “This case demonstrates the Criminal Division’s commitment to hold corporate executives, including at the world’s largest and most sophisticated institutions, responsible for their crimes.”

Of course, we’re almost certain that if you pump a couple of beers into any trader on wall street and then ask for their opinion on this particular case you’ll quickly be informed that it’s just an effort to “criminalize behavior that is normal”…at least on wall street anyway.


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Author: Tyler Durden

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