Insider information leads to fraud scheme, arrests and conviction

Employees at HSBC Bank plc used insider information to their benefit, defrauding a client and generating millions of dollars for themselves.

Insider information leads to fraud scheme, arrests and conviction

A year after being arrested, the former head of global foreign exchange cash trading at HSBC Bank plc was found guilty of orchestrating a multimillion-dollar “front running” scheme.

Mark Johnson, 51, of the United Kingdom was found guilty of wire fraud and leveraging insider information to manipulate the foreign exchange market for the benefit of his bank, HSBC, and his bonus pool.

His colleague, Stuart Scott, former foreign exchange trader and head of foreign exchange cash trading for Europe, Middle East and Africa, is also involved. Scott, also of the U.K., was arrested in July 2017 in London at the request of the United States. He appeared in court and is currently free on $129,000 (100,000 pounds) bail. However, the U.S. is trying to extradite him, so he may also be brought to trial on the charges of feathering his own nest at the expense of his clients.

Taking advantage of insider information

The charges upon which Johnson was found guilty and Scott has been arrested stem from their using insider information to manipulate and defraud Cairn Energy Plc, which purchased $3.5 billion in sterling using a “front running” scheme that put $8 million into HSBC coffers.

The scam run by Scott and Johnson saw HSBC trade ahead of their customers (front running) and then they executed these transactions in such a manner to cause the currency to spike (ramping), all designed to generate more commissions for HSBC.

According to the criminal complaint, their victim, Cairn Energy, reached out to HSBC and approximately nine other banks to bid on the right to execute the trade of $3.5 billion into U.K. sterling. In their bid materials, HSBC specifically noted, “Time to execute is essentially a choice for the company, as HSBC is able to provide one quote for the full amount or even drip feed the market in the utmost confidential nature so as to ensure there are no sudden FX (foreign exchange) moves against the company.”

On Nov. 30, 2011, two days after Cairn Energy advised HSBC that the transaction would be happening soon, Johnson made a purchase in his P-Book (broker’s personal trading account) of Sterling using Euros, which he held until after the Cairn Energy transaction, thus benefiting HSBC with a higher price caused by the Cairn Energy spike.

Then on Dec. 5, 2011, Johnson made another purchase of Sterling using U.S. dollars. The next day, Scott also made a purchase of Sterling using Euros, thus filling the account book with Sterling, purchased at the pre-Cairn Energy transaction price, which would allow for the HSBC employees to garner a quick profit on behalf of HSBC by manipulating their trusted insider position.

On Dec. 7, 2011, Cairn Energy called to time the sale. Within minutes of hanging up from the call, Scott ordered the purchase of Sterling for HSBC and had others within HSBC purchase Sterling for their own P-Books. Later that same afternoon, Cairn Energy ordered the purchase of Sterling in two tranches, totaling $3.5 billion.

The forensics trail

A review of telephone calls between Johnson and Scott (which were recorded consensually) the two discussed how high they could “ramp” the price before Cairns Energy would “squeal.” Their efforts assured that the “fix price” at the hour of execution was the highest for that trading day, thus providing their client with the highest possible, not the lowest possible price.

This might not have been Johnson’s or Scott’s first rodeo in leveraging their insider information for personal benefit. But the forensic trail they left behind clearly indicates they did not think anyone would be observing their actions. Their recorded conversations in which they discuss hosing their client is a good example.

There is also the minor fact that $3.5 billion is not chump change and their client, Cairns Energy, was closely observing the markets in anticipation of their large purchase. When they saw the multiple up-ticks of the currency price, they contacted HSBC to determine what was happening. HSBC told their client, “A Russian” was buying, when it was actually Johnson and Scott purchasing on behalf of HSBC.

When the dust settled, HSBC garnered $5 million for their commission on the execution of the transactions and $3 million in gains from the various HSBC P-Books.

Last year, the U.S. Department of Justice filed a criminal complaint and obtained arrest warrants for Johnson and Scott. Johnson was arrested in July 2016. Scott was arrested in July 2017.

While the sentencing for Johnson has not yet been determined. What is known is that during the trial, Johnson wasted no time in throwing Scott under the proverbial bus, declaring Scott was responsible for the front running scheme. Two insiders with sensitive information, which was given in confidence due to the trustworthiness of HSBC to process the transaction, broke that bond of trust.

We will have a second opportunity to hear of this case, which will no doubt include Johnson testifying against his former subordinate, when Scott is finally extradited from the U.K. to the U.S.

Copyright © 2017 IDG Communications, Inc.

How to choose a SIEM solution: 11 key features and considerations