A top HSBC executive has been charged with fraud in the US.
Mark Johnson, the company’s global head of foreign exchange trading was arrested on Tuesday night and is due to appear in court later. A former colleague, Stuart Scott, has also been charged.
The two traders are accused by the US government of using inside information to profit from a $3.5bn (2.6bn) currency deal.
HSBC has so far declined to comment.
The US Department of Justice (DoJ) accuses the traders of “front-running”.
That is misusing confidential information provided by a client who planned to convert $3.5bn into British pounds.
It is claimed that the two executives bought sterling themselves before handling the order, because they knew that such a large transaction would push up the value of the currency, and allow them to make money.
They also timed the purchase in order to maximise its effect on the value of the British currency. As a result it’s alleged they were able to generate significant profits for the bank. They are also accused of concealing their actions from the client.
“The charges and arrest announced today reflect our steadfast commitment to hold accountable corporate executives and licensed professionals who use their positions to fraudulently enrich themselves,” said the US Attorney Robert Capers.
US prosecutors cited emails and conversations from Bloomberg chats that indicated the two men plotted to see how high they could raise the the dollar to pound exchange rate before the clients would ‘squeal’.
The DoJ said that HSBC brought in roughly $8m profit from the currency trades they conducted for client.
Front running is an unethical way for a broker to benefit from a client’s trade.
When companies or individuals want to buy a substantial amount of currency- for example dollars in exchange for pounds – they typically go through a broker. A large purchase can push up the value of that currency.
Knowing this, the broker can buy dollars on his own account ahead of the deal, carries out his client’s transaction, watches the value of dollars rise, and then sells his own dollars at a handsome profit.
In the charges released on Wednesday, the DoJ cites specific trades Mr Johnson and Mr Scott made in late 2011.
In late November and early December of that year, Mr Johnson allegedly purchased pounds in exchange for euros, and pounds in exchange for dollars.
Mr Scott allegedly made a purchase of pounds in exchange for euros.
The two men are accused of then selling their sterling to HSBC, for a profit on the day of the alleged victim’s foreign exchange transaction.
The DoJ also accused the two men of encouraging the alleged victim to conduct the trade at a specific time during the day, because it was easier to manipulate the price then.
“It was advantageous to them and HSBC, and disadvantageous to the victim company, to execute the victim company foreign exchange transaction” at the time they did, the DoJ said.
About 40% of the world’s currency dealing is estimated to go through trading rooms in London.
The massive market, in which $5.3 trillion worth of currencies are traded daily, dwarfs the stock and bond markets.
There is no physical forex marketplace and nearly all trading takes place on electronic systems operated by the big banks and other providers.
Daily “spot benchmarks” known as “fixes” are used by a wide range of financial and non-financial firms to, for example help value assets or manage currency risk.