HSBC currency unit used code to trigger front-running

NEW YORK: A group of HSBC Holdings Plc currency traders in London and New York feverishly jumped ahead of a US$3.5 bil client order after they were tipped off using the code words “my watch is off,” a US prosecutor told a federal judge.

The buying frenzy was launched after Mark Johnson, HSBC’s former global head of foreign exchange who the bank chose to lead the transaction, alerted the traders via phone call that was recorded, the prosecutor said Thursday in Brooklyn, New York. Johnson is on trial for fraud.

After the trial recessed for the day, prosecutor Carol Sipperly told US District Judge Nicholas Garaufis that the government wants the jury to hear the recordings on Friday, in which Johnson can be heard tipping off a trader in Hong Kong, a signal that she said eventually reached others on both sides of the Atlantic. 

Prosecutors say Johnson and Stuart Scott, the bank’s former head of currency trading in Europe, along with these other traders, bought pounds before the transaction, collectively making the bank US$8mil in illicit profit. 

Sipperly said the call involved Johnson, who was in New York that day, speaking to Scott who was in London, just before the Dec 7, 2011, transaction for its client, Cairn Energy Plc. 

”We actually have Mark Johnson telling Stuart Scott â?Tell Ed my watch will be off,’” she said. “We have communications where the word â?watch’ is used, and then within seconds, 20 seconds of â?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.”

Chart Evidence

Earlier in court, prosecutors showed jurors charts of the trading by Johnson, Scott, four traders in New York and five traders in London that day, showing they made about US$3mil in profit. Rob Sherman, a spokesman for HSBC in New York, didn’t have an immediate comment.

Johnson’s lawyer John Wing argued the tapes shouldn’t be aired at the trial because his client used the term “watch” to mean something entirely differently. “'?My watch is off’ is a code designed to tell people keep this confidential, don’t let the salesmen know about it,” Wing said.

Garaufis, who hasn’t ruled on the government’s request, told lawyers he would listen to the recordings and issue a ruling Friday.

”I’m an expert in conspirators, all right," Garaufis said. “You can be a conspirator by just putting your finger on your ear lobe to indicate assent in a Mafia case. You don’t have to say a single word.”

Order Filling

HSBC was hired by Cairn to convert the proceeds of a unit sale from dollars into pounds. While the bank promised it would be a “drip feed” transaction, prosecutors say instead that about 90 minutes before the trade that was to occur, Johnson and Stuart Scott bought pounds ahead of the trade and tipped off other currency traders at the bank.

The defense suggested in questioning that the spate of buying by these other men at the bank was an attempt to help Frank Cahill, the former HSBC currency trader who was fulfilling Cairn’s order.

But Ross Waller, a former trader at Bridgewater Associates who testified as an expert witness for the government, said Thursday that Cahill’s feverish demand for pounds, compounded with the frenzied buying by the other traders, ended up dominating about 75% of trading in the five minutes before the Cairn trade was to be executed and caused the pound’s price to jump. Trading records also indicate the others weren’t selling to Cahill to help him fill the order, Waller said. - Bloomberg

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