Federal Reserve suspends two traders for criminal fraud

Federal Reserve suspends two traders for criminal fraud

Mark Johnson and Stuart Scott, former senior HSBC managers, were recently indicted for criminal wire fraud in connection with front-running activities at HSBC Bank plc, a subsidiary of HSBC.

Federal Reserve Building.
Marriner S. Eccles Federal Reserve Building, Washington, D.C. (Via Wikipedia entry on Federal Reserve)

WASHINGTON, October 11, 2016 — The Federal Reserve suspended two foreign exchange traders from working in banking pending the outcome of their criminal cases, according to a recent Federal Reserve press release:

“The Federal Reserve Board on Thursday took action to bar two former foreign exchange (FX) traders of HSBC from employment in the banking industry. Mark Johnson and Stuart Scott, former senior HSBC managers, were recently indicted for criminal wire fraud in connection with their trading activities at HSBC Bank plc, a subsidiary of HSBC which is a U.S. bank holding company.”

Johnson and Scott were indicted in a Federal Court for the Eastern District of New York in an alleged front-running scheme. In currency trading, this occurs when inside information that a large purchase of a currency is about to be made is used to buy currency ahead of the transaction, thus illegally profiting by means of information not made available to the public.

Through his attorney, Frank Wohl, Johnson challenged the suspension, claiming:

“This suspension is based solely on the existence of the indictment, which is entirely unfounded. The banking regulators did not conduct any independent investigation of the transactions charged. When all the facts come out, it will be clear that Mr. Johnson engaged in no wrongdoing. He will be found not guilty and reinstated.”

Johnson and Scott were part of a HSBC foreign exchange team that was contracted out by an unidentified company that is referred to only as “Victim Company” in the affidavit for their arrest by the Federal Bureau of Investigation (FBI) agent in charge, Francis Mace. According to Mace, the “Victim Company” executed a deal to sell its subsidiary to an Indian Company for $3.5 billion and convert the proceeds to British Pounds.

At HSBC, Johnson served as managing director and the global head of FX (foreign exchange) cash and supervised Scott, who was head of FX trading for Europe, the Middle East, and Africa, received the contract to execute the transaction.

HSBC signed a strict non-disclosure agreement which prohibited the bank from using this inside information in any way but to execute the transaction. Despite this, however, Johnson and Scott executed two purchases of British Pound within ten days of executing the $3.5 billion transaction, according to Mace’s affidavit.

Mace states that the scheme went beyond Scott and Johnson to at least one more HSBC manager (identified only as Supervisor 1), who said on a phone call, “We don’t want to push the market too much higher on this (the unauthorized trades), but at the same time we want to make money on this.”

Scott and Johnson both worked out of the London office at the time. Scott left HSBC in 2014 after an investigation concluded by the UK Financial Conduct Authority and the US Commodity Futures Trading Corporation fined the bank $618 million for currency rigging, according to a Bloomberg report.

Johnson was still employed by HSBC at the time of his arrest in New York in July, according to the same Bloomberg story, however the Federal Reserve press release identifies him as a former employee.

An email to HSBC requesting further details remains unreturned.

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