Johnson Case Grinds on as Defence Rebuts “Meritless” Prosecution Arguments
Posted by Colin Lambert. Last updated: October 16, 2023
With The Full FX View
Lawyers for former HSBC head of FX cash trading Mark Johnson have filed a reply to the US Department of Justice’s response to his application for Coram Nobis, effectively an attempt to vacate his conviction and return financial penalties, citing the US government’s “legally meritless” arguments.
Johnson filed the Coram Nobis in July, following news that the US Supreme Court had invalidated “Right to Control” as a means of conviction for wire fraud, a ruling cited by the DoJ as a reason for dropping similar charges against his former colleague Stuart Scott.
In the latest filing, Johnson’s lawyers notes that in spite of a US appeals court upholding his conviction solely on the Right to Control theory, he is still branded a felon and is unable to practice his profession and support his family. “This miscarriage of justice is exactly what coram nobis is designed to remedy,” the latest filing states. “Yet the government stubbornly resists any relief, even though – after Ciminelli [the case in which Right to Control was invalidated by the Supreme Court] – it dismissed long-pending charges against Mr. Johnson’s co-defendant. To cling to this conviction, the government takes multiple tacks, hoping something will stick, but all its arguments conflict with governing law.”
The filing also argues that the DoJ takes a position that is too broad when assessing the relationship between HSBC and Cairn Energy, the customer on whose behalf the bank was selling $3.5 billion for Sterling in 2011 and wrongly focuses on earlier documentation in the deal process, namely a non-disclosure agreement, at the expense of legal documents that did actually have some standing, specifically ISDA documentation.
The filing also argues that, “…The idea that in a commercial transaction between arms-length counterparties, the more sophisticated party owes a fiduciary duty to the less sophisticated one finds no support in the law. The notion that Cairn, which was advised by sophisticated counsel and Rothschild – Europe’s “premier investment bank”, could not fend for itself is laughable.”
The Full FX View
I am no expert on the US legal system, hence perhaps why a lot of decisions in that jurisdiction surprise me, but to read the US government’s arguments against vacating Mark Johnson’s conviction is to feel like the prosecution is the side constantly switching arguments, not the defence – and that, surely, is not how the legal system is meant to work?
I recall in the original trial there was much made of HSBC buying ahead of the one-minute window, with the prosecution suggesting it was front-running. As I wrote then, and several times since, while I am no fan of (pre)hedging a Fix, it would have been impossible to buy over two yards of sterling in one-minute – it would have created a flash event.
Roll forward to the first appeal, and the government stance changed, with it, to the best of my memory, suddenly accepting that buying ahead of the Fix was a sensible course of action, but that Johnson had violated Right to Control laws, namely he had taken advantage of a less sophisticated player in the FX market and cost them money.
Now, at the latest stage, the government appears to have changed tack again, arguing that Johnson had a fiduciary duty to Cairn – an argument it did not make in the original trial.
This approach has all the hallmarks of the old press tactic of throwing enough muck at a target in the hope that some of it sticks. It is a scatter-gun approach that seeks only to highlight the prosecution’s lack of understanding how the FX market works.
In terms of a fiduciary duty to Cairn energy, as I see it the bank had one obligation and that was to achieve best execution. What that consists of is a fluid argument in itself, but generally speaking, it would have been nonsense to try to buy all that Sterling in one minute and Cairn’s treasurer knew that, stating in internal emails that HSBC would make money by buying some sterling ahead of the Fix. These are the words of someone who knows how the FX market works.
More pertinently, the prosecution seems to have totally ignored the role of Rothschilds in this whole sorry episode – Cairn was advised by that bank and Francois Jarrosson, the person advising the company, is registered with the UK’s Financial Conduct Authority as an FC30, meaning they can advise on investments and other financial decisions. If you want some irony with your breakfast, Mark Johnson held exactly the same status – how does this translate into a relationship where one has a fiduciary duty?
In a call cited in the Appeal Court decision in 2019, the judges noted that Johnson and Jarrosson had a call during which the former explained that late notice of an intention to deal at the Fix (30 minutes in this case) would mean HSBC would create market impact. He also observed then that HSBC would make a small amount of money out of the transaction through this (pre)hedging. It is hard to know what more can be done to stress that the relationship was one between two professionals of equal standing.
The big issue with this continuing case is for Mark Johnson to be able to work professionally again as well as get relief on some pretty large charges that come as a result of a conviction (insurance being one). There is a just as big an issue for the FX industry as a whole, however, for this inevitably brings us back to the issue of buying ahead of the Fix.
Most pre-trade TCA models highlight the need to smooth out an execution over a longer window than the five minutes currently on offer from WM, and that means buying ahead of the window actually opening. One constant amidst the ever-moving prosecution arguments, is that the US government is demonstrating that it believes that such activity is illegal.
At the moment we tend to hide behind the FX Global Code’s rather tepid disclosure clause that effectively argues as long as the executing party discloses it will trade ahead of the Fix then it is immune from sanction. Johnson told Jarrosson just this, and Cairn’s treasurer accepted the fact, but that has not stopped what has been seven years and counting of misery for Johnson and his family.
Most FX professionals, not all I accept, believe that Johnson’s conviction should be vacated (we haven’t even got into the fact that he wasn’t the trader actually executing the order), and it is to be hoped that it will be. If it isn’t however, the FX industry will have some serious introspection in prospect, for an issue many believe solved will once again be back in the spotlight, and, again, a lot of dealers and managers could be looking over their shoulders nervously thanks to conduct that was accepted, but then suddenly is not.
In its own response, the government argues that because HSBC exercised a “high degree of discretion” in handling the deal it was demonstrating it had a relationship of “trust and confidence”. Johnson’s lawyers, meanwhile, point out that “The reason HSBC had discretion is that it wasn’t trading for Cairn’s account or on Cairn’s behalf. Rather, it was acting as Cairn’s counterparty in the deal.
“That is precisely why the contract disclaimed any fiduciary-like relationship,” it continues. “Indeed, every fix transaction confers such discretion on the bank’s traders, which is why the ISDA – a standard contract in the industry – typically provides that each party is acting for its own behalf. And the Second Circuit has already held that a multitude of analogous fix transactions performed by HSBC “did not give rise to…fiduciary status.”