On January 18, 2018, HSBC Holdings Plc (“HSBC”) entered into a deferred prosecution agreement with the Department of Justice, Criminal Division, Fraud Section (“DOJ”) pursuant to which it will pay $101.5 million in criminal penalties and disgorgement to resolve two counts of wire fraud under 18 U.S.C. § 1343. Deferred Prosecution Agreement, United States v. HSBC Holdings Plc, No. 1:18-cr-00030 (E.D.N.Y. 2018), ECF No. 3-2. The charges arose out of two transactions in 2011 where HSBC foreign exchange (“FX”) traders allegedly engaged in “front-running,” or trading ahead of a client’s trade, to manipulate the price of currency.
This settlement follows the conviction of HSBC’s former head of foreign exchange, Mark Johnson, on eight counts of wire fraud and one count of conspiracy to manipulate the price of foreign currency in October 2017, on which we have previously reported. Forex Trader Found Guilty of Defrauding Client, Oct. 31, 2017, http://www.lit-wc.shearman.com/forex-trader-found-guilty-of-defrauding-clientnbs. One of Johnson’s alleged co-conspirators, Stuart Scott, faces similar charges but is currently fighting extradition from the United Kingdom.
According to the DOJ, Johnson’s alleged scheme centered on a client who sought to exchange approximately $3.5 billion USD for British pounds sterling (“GBP”) on a specified date after it sold its shares in a foreign subsidiary. Based on the knowledge of this upcoming trade, Johnson and his team allegedly had various traders purchase GBP for proprietary accounts before the planned transaction, which then increased the market price of GBP. The DOJ claims that Johnson also deliberately structured the client’s transactions to further increase the price of GBP, which benefitted Johnson and his co-conspirators at the expense of the client.
In connection with this alleged misconduct, HSBC entered into a three-year DPA, in which it received credit for its “substantial cooperation” and “extensive remedial measures.” This settlement with HSBC marks the sixth parent-level resolution with a major international financial institution relating to the FX market in the past three years. However, the other FX cases have involved allegations of complex and long-running schemes to manipulate FX markets, as opposed to allegations involving individual transactions.