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HSBC Traders Used Code Word to Trigger Front-Running, U.S. Says

With just four words, Mark Johnson allegedly passed a secretive signal to fellow HSBC Holdings Plc currency traders to launch a buying spree of pounds: "My watch is off."

The bank’s former global head of foreign exchange alerted the traders around the globe via a phone calls and chat messages in December 2011 that were recorded. The gambit was designed to take advantage of a $3.5 billion client order to buy sterling, the U.S. says.

After a ruling from U.S. District Judge Nicholas Garaufis Friday, jurors listened to the recordings, which prosecutors say show Johnson tipped off a trader in Hong Kong. That signal eventually reached others on both sides of the Atlantic and sparked a flurry of trading, prosecutors say. Johnson was in New York that day, speaking to Stuart Scott, the bank’s former head of currency trading in Europe, who was in London, just before the transaction for its client,Cairn Energy Plc.

The next day, Johnson discussed the events with a colleague on a recorded call.

"New York managed a bit and London just had a bonanza on it," Johnson said. "I had quite a big day anyway, because I made it on other stuff, then we just ramped it on that."

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

Johnson is on trial in federal court in Brooklyn, New York, accused of a scheme that produced a $8 million profit for his bank. In another recorded call, Johnson discussed the effect of the deal on bankers’ compensation.

"It makes us look good if we have a good December," Johnson said. "Hopefully, you can only hope to influence things when numbers are rounded come the end of the year, so um, yeah! It’s good for morale."

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 occurred, Johnson and Stuart Scott bought pounds and tipped off other currency traders at the bank.

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

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 atBridgewater 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 percent of trading in the five minutes before the Cairn trade was 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.

The case is U.S. v. Johnson, 16-cr-457, U.S. District Court, Eastern District of New York (Brooklyn).

via Bloomberg

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