The US Federal Reserve is ordering HSBC Holdings PLC (HSBC) to pay a $175M fine, accusing the bank of engaging in practices that were “unsafe and unsound” in its foreign exchange trading business. According to the Fed, HSBC did not properly oversee chat rooms in which traders exchanged information about investment positions.
The authorities contend that the bank’s traders exchanged confidential information about client orders and coordinated trades to enhance profits. As part of the securities enforcement action, HSBC will have to improve its controls and compliance risk management as it pertains to FX Trading.
Ex-HSBC Forex Spot Trader Head Accused of Front Running
In a different case, Mark Johnson, the former head of HSBC’s foreign exchange cash trading desk, is on trial over allegations of “front-running” involving forex spot trading. He and co-conspirator Stuart Scott have been charged with wire fraud and conspiracy for allegedly defrauding Cairn Energy PLC in a multi-billion dollar transaction that occurred in 2011. Front-running involving forex markets usually refers to the making of a trade that is proprietary prior to a customer making a potentially market-moving trade in order to profit.
According to the criminal indictment, the two men colluded to mislead Cairn about how to best execute a currency transaction as it was getting ready to sell its interest in one Indian subsidiary. Cairn reached out to a number of banks, including HSBC, for bids on a request for proposals to help it convert the $3.5B in sale proceeds to pounds Sterling. The banks who wanted to bid were required to sign confidentiality agreements.
Johnson and Scott allegedly took favorable positions for themselves and HSBC but did not disclose this prior to Cairn’s trade. They then allegedly sought to keep the British oil and gas company from discovering their actions, which included buying pounds Sterling in the days and hours ahead of Cairn’s trade being executed.
They are accused of causing the price of Sterling to go up through aggressive trading close to when Cairn’s trade was to go through, which benefited them while hurting the corporate client. They allegedly misled Cairn by recommending that it make its trade during the 3p fix instead of the 4p one because they knew that to trade at an earlier time would make it easier for them to rig the Sterling’s price.
At issue is HBSC’s duty of confidentiality agreement to Cairn regarding the representations the bank made while bidding on the proposed forex transaction. The bank had agreed that information it received from Cairn would only be used to analyze the forex transaction it was seeking to bid on. Any other use of the information required the British and Oil gas company’s written consent.
Also, the bid by HSBC was supposed to represent that it would work with the company to not only make sure the best execution of the transaction occurred but also that it would be executed in Cairn’s best interest. According to the government, the confidentiality agreement, the best execution representations, and Cairn’s reliance on HSBC’s expertise in foreign trading established a fiduciary-like duty between the two.
What To Expect In Forex Fraud Trial Of Ex-HSBC Exec, Law360, September 22, 2017
More Blog Posts:
JPMorgan Suspends Forex Trader for Alleged Disclosures Involving Royal Bank of Scotland-Related Activities, Institutional Investor Securities Blog, January 14, 2015
BNP Paribas Settles NY Currency Rigging Investigation for $350M, Institutional Investor Securities Blog, May 30, 2017
Brothers Plead Guilty in $40M Oregon Ponzi Scam That Bilked 400 Investors, Stockbroker Fraud Blog, September 18, 2017