Mark Johnson, former head of global foreign exchange cash trading at HSBC Bank, and Stuart Scott, former head of FX cash trading for HSBC for Europe, the Middle East and Africa, were named in criminal action brought by the US Attorney’s Office in Brooklyn, NY, for allegedly front running an HSBC’s customer’s trading in British Pounds in November and December 2011. Both Mr. Johnson and Mr. Scott are UK citizens and residents. Mr. Johnson, also a US resident, was arrested in connection with this complaint on July 19. According to the criminal complaint, both individuals purportedly conspired to trade on information confidentially provided to HSBC by an unnamed customer that planned to sell part of its interest in an Indian subsidiary for US $3.5 billion, and then convert the sale proceeds to British Pounds for distribution to its shareholders. In October 2011, HSBC was awarded the mandate to arrange this conversion after the company conducted a Request for Proposal process involving approximately 10 banks. HSBC allegedly gave both defendants access to information regarding the proposed foreign exchange conversion and officially deemed them as “insiders.” As insiders, alleged the complaint, the defendants “knew they had an obligation not to misuse the Confidential Information, including by front-running.” Instead, said the complaint, defendants established their own British Pound positions in HSBC proprietary accounts to take advantage of the customer’s impending conversion transaction, and orchestrated the customer’s actual currency conversion in a manner to maximize their profits. According to the US Attorney’s Office, HSBC profited by approximately US $8 million as a result of its execution of the FX transaction for the company, including from defendants’ allegedly illicit conduct. The defendants were charged with conspiring to defraud a client.

Legal Weeds: The criminal action against Mr. Johnson and Mr. Scott for fraud sounds like a securities action for insider trading based on a theory of misappropriation. A civil action was recently brought (and settled) by the Commodity Futures Trading Commission that also echoed the securities concept of insider trading, relying on the relatively new Dodd-Frank Wall Street Reform and Consumer Protection Act’s prohibition against employment of a manipulative or deceptive device in connection with futures trading. According to the CFTC, from September 3 through November 26, 2013, Arya Motazedi, a gasoline trader employed by an unnamed “large, publicly traded corporation” misappropriated “non-public, confidential and material information” of his employer to benefit his own trading of energy futures contracts listed on the New York Mercantile Exchange, Inc. Specifically, on 34 occasions Mr. Motazedi allegedly traded opposite his employer’s accounts to effectively and illicitly transfer funds from the firm to himself, and on 12 other occasions he traded in advance of orders he placed for the firm to generate “additional profits for himself to the detriment of the company.” The CFTC claimed that Mr. Motazedi owed a duty of confidentiality to his employer. This duty arose, said the Commission, because he and his employer “shared a relationship of trust and confidence,” and because his employer had express policies that prohibited him from engaging in personal transactions that “created an actual or potential conflict of interest.” The CFTC charged that Mr. Motazedi’s trading constituted fraud, as well as impermissible fictitious sales and noncompetitive trades. (Click here for details regarding this enforcement action in the article, “CFTC Brings First Insider Trading-Type Enforcement Action Based on New Anti-Manipulation Authority” in the October 6, 2015 edition of Bridging the Week.) A second insider trading-type case may be pending at the CFTC. (Click here for details in the article, “Trader Sanctioned Over US $3 Million by CME Group for Trading on Confidential Employer Information; Both He and Wife Barred From Exchange Trading” in the June 19, 2016 edition of Bridging the Week.)