MANHATTAN/NEW YORK (Sept 26): Fraud charges against a former HSBC Holdings Plc foreign-exchange trader are "a governmental mistake," his lawyer said, calling his actions "consistent with standard practice" in the currency market.

US prosecutors claim the trader used his "expert" skills to turn a large customer currency order into a multimillion-dollar profit for the bank.

Mark Johnson, 51, was assigned to conduct a US$3.5 billion ($4.7 billion) currency transaction, and used knowledge of the order to reap US$8 million for the bank, prosecutors say. He is accused of wire fraud and conspiracy for manipulating the pound to take advantage of inside information about client Cairn Energy Plc’s plans to sell part of its stake in an Indian subsidiary and convert the proceeds from dollars into pounds. Johnson, who no longer works for the bank, denies wrongdoing.

Frank Wohl, Johnson’s lawyer, told a federal jury in Brooklyn, New York, on Monday that Cairn officials consented to the terms of how the transaction was going to be handled. HSBC advised the client that the bank would be buying pounds ahead of the transaction and they agreed to it, he said.

"There was no front-running here, there was no misuse of client information," Wohl said. "His purpose throughout this transaction was first of all to protect the bank from losing money."

Assistant US Attorney Lauren Elbert told jurors that Johnson and his colleagues traded ahead of the Cairn’s order, causing the price of sterling to rise ahead of the transaction, resulting in Cairn paying an inflated price.

"When Johnson heard about the deal, all he saw were dollar signs," she said. "He threw his client under the bus to make more and more money and that’s why we’re here today."

The fraud charges against Johnson and a colleague are the first brought against individuals and come amid a global probe into foreign-exchange market manipulation. That investigation saw major global banks agree to pay about US$10 billion in fines.

The US says the scheme lasted the span of a few months from October 2011, through December 2011. The bank selected Johnson to head the team that executed the order from Cairn. The Edinburgh-based oil and gas exploration and development company sought to convert the proceeds from selling a unit to Vedanta Resources Plc.

HSBC promised Cairn it would "drip feed" the market with its purchases so as not to drive up the price of sterling, prosecutors say. Instead, Johnson and Stuart Scott, then HSBC’s head of foreign exchange cash trading in Europe, filled the order using a technique that caused the price of sterling to spike.

Elbert said former HSBC colleagues of Johnson who were part of the scheme have agreed to testify for the government in exchange for leniency.

"Mark Johnson and his fellow bankers at HSBC came up with a scheme to make a huge amount of money," Elbert said. "He exploited the confidential information he knew about to make money."

Client Duties

Wohl said Johnson fulfilled his duties to the client. He said two HSBC employees traders who will testify for the government also leaked confidential information to other banks and only cooperated to get non-prosecution agreements.

"If the transaction didn’t work out perfectly in Cairn’s point of view, that’s not his fault," he said.

David DeRosa, a Columbia University professor, testified as an expert witness for the prosecution. During cross-examination, Wohl asked DeRosa if it was acceptable for a bank conducting a large buy order for a client to purchase that currency ahead of the transaction.

"It sounds like front-running to me, sir," DeRosa said.

"You’ve never heard of pre-hedging?" Wohl asked.

"I’ve heard of it, but it’s controversial, in that the bank is buying for its own account and could affect the price," DeRosa said.

Wohl asked if DeRosa knew of any regulation prohibiting such activities by a bank. "I’m not sure there’s any foreign-exchange rule against it, but I believe it’s not best practice," DeRosa said.

Scott, 44, who was arrested in June in London and denies wrongdoing, is fighting extradition to New York for trial. 

US District Judge Nicholas Garaufis told jurors the trial should last about one month.

The case is US v. Johnson, 16-cr-457, US District Court, Eastern District.