New York/London: An India link has emerged in the alleged USD 3.5-billion forex trading fraud case at British banking giant HSBC, where two senior executives have been accused of doing 'front-running' by cheating a client that was selling part-stake in an Indian subsidiary.
The duo has been charged in the US of "conspiracy to commit wire fraud" while the client in question has been identified in media reports as Cairn Energy, which had sold an ownership stake in its Indian subsidiary Cairn India for USD 3.5 billion in 2010 and wanted to convert it into sterling to distribute cash to shareholders.
Cairn had selected HSBC to conduct the forex conversion transaction from amongst ten banks it had asked to bid for the right while asking them to sign a 'confidentiality agreement' regarding the information about the transaction.
One of the two persons, HSBC Bank's head of forex cash trading Mark Johnson, was arrested on Tuesday night at New York airport but was released on a USD 1 million bail amount yesterday.
Johnson has been charged for trading ahead of his client to make millions of dollars, while similar charges have been levelled on Stuart Scott, who formerly served as HSBC's head of forex cash trading for Europe, Middle East and Africa but left the bank in December 2014.
The US Department of Justice said in a statement that the two have been charged with conspiring to defraud a client of HSBC through a scheme commonly referred to as 'front running'
-- a practice in which traders fraudulently conduct trades with advance information about an impending deal.
While the Department did not disclose the name of the client, the British media reports identified it as Cairn Energy, which had indeed sold a majority stake in its Indian subsidiary to Vedanta Resources and was to distribute USD 3.5 billion worth sale proceeds among its shareholders.
As per the court documents made public by the Department, "In approximately 2010, the victim company entered into an agreement with another company to sell part of its ownership interest in an Indian subsidiary for approximately USD 3.5 billion.
"Execution of the sale was dependent upon regulatory approval in India. If the sale was approved, the victim company planned to convert approximately USD 3.5 billion in sale proceeds into Sterling, which it intended to distribute to its shareholders."
HSBC was later mandated by Cairn for carrying out the foreign exchange transaction and also signed a confidentiality pact, but the duo conspired to buy sterling "in advance of the transaction, knowing that the transaction would cause the price of sterling to increase, thereby generating substantial trading profits for HSBC and the defendants".
In the market parlance, this practice is called 'front running' and is against the market regulations. The two have also been charged of executing the purchase transactions in such a manner as to "cause the price of sterling to spike" at the expense of the 'victim company',
which was later sold sterling at the higher price. "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," US Attorney Robert Capers said in a statement.
"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," he added.
Assistant Attorney General Caldwell said the two "allegedly betrayed their client's confidence, and corruptly manipulated the foreign exchange market to benefit themselves and their bank".
The two have been accused of defrauding their client by "misusing confidential information to manipulate currency prices for the benefit of the bank and themselves".
According to the complaint, in November and December 2011, Johnson and Scott misused information provided to them by a client that hired HSBC to execute a foreign exchange transaction related to a planned sale of one of the client's foreign subsidiaries.
HSBC was selected to execute the foreign exchange transaction — which was going to require converting approximately $3.5 billion in sales proceeds into British Pound Sterling — in October 2011.
HSBC's agreement with the client required the bank to keep the details of the client's planned transaction confidential. Instead, Johnson and Scott allegedly misused confidential information they received about the client's transaction.
On multiple occasions, Johnson and Scott allegedly purchased Pound Sterling for HSBC's 'proprietary' accounts, which they held until the client's planned transaction was executed.
The complaint further alleges that, as part of the scheme, both Johnson and Scott made misrepresentations to the client about the planned foreign exchange transaction that concealed the self-serving nature of their actions.
Specifically, the complaint alleges that Johnson and Scott caused the $3.5 billion foreign exchange transaction to be executed in a manner that was designed to spike the price of the Pound Sterling, to the benefit of HSBC and at the expense of their client.
In total, HSBC allegedly generated profits of roughly $8,000,000 from its execution of the forex transaction for the 'victim company', including profits generated from the front running conduct by Johnson, Scott, and other traders whom they directed.
The investigation is being conducted by the FDIC's Office of Inspector General and the FBI's Washington Field Office....