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Speaker 1: It's a case that currency traders are watching to see

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Speaker 1: how far they can push the envelope. After two weeks,

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Speaker 1: prosecutors in Brooklyn have rested their case against the first

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Speaker 1: person to go on trial following a global crackdown on

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Speaker 1: currency market rigging. Prosecutors say former currency trader at HSBC

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Speaker 1: Mark Johnson was assigned to conduct a three point five

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Speaker 1: billion dollar currency trade code name Project Shine, and then

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Speaker 1: he used knowledge of the order to purchase sterling before

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Speaker 1: the transaction, making eight million dollars in illicit profits for

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Speaker 1: the bank. Joining me is Robert Hocket, a professor at

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Speaker 1: Cornell University Law School. Bob, will you start with a

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Speaker 1: description of the charges and front running? Sure, and thanks

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Speaker 1: for having me on the engine. So that that charlege

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Speaker 1: is that is that Mr Johnson had, of course the

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Speaker 1: inside information about the pending currency purchase, because of course

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Speaker 1: he received the order, and so he claim is that

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Speaker 1: sort of an anticipation of that purchases actual actually happening.

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Speaker 1: He bought a lot of tound sterling on the chief

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Speaker 1: with a view right essentially to capitalizing on the price

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Speaker 1: rise that would occur if he structured the order itself.

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Speaker 1: What sort of properly right in a man and that

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Speaker 1: sort of drove up the price. So the claim is

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Speaker 1: that this is essentially a fraudulent act because he essentially

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Speaker 1: endeavored to manipulate the price of the currency in a

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Speaker 1: way that rendered it more expensive for his clients. Uh.

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Speaker 1: And of course at the same time, he paid very

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Speaker 1: little for it or much less for it himself, and

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Speaker 1: so he was essentially pocketing the spread between those two

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Speaker 1: of those two prices. Also joining us is Lennon Newan.

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Speaker 1: She's a Bloomberg FX reporter. Lennon the jury has heard

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Speaker 1: tapes of a phone call prosecutors say is the real

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Speaker 1: time talk of the front running scheme. It's hard to be.

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Speaker 1: Tapes as evidence tell us about the call, Well, what

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Speaker 1: the There's a lot of trader jargon in the phone

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Speaker 1: call June, but what essentially is occurring is, uh, the

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Speaker 1: traders are talking about a process called ramping the price,

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Speaker 1: which means um, you know, artificially inflating the price by

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Speaker 1: buying a lot of pounds. So the prosecutors are alleging

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Speaker 1: that they did this, um you know, to disadvantage their

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Speaker 1: client and to make the client end up paying um

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Speaker 1: an inflated price. For the pounds. Bob, one of the

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Speaker 1: prosecutions excort witnesses, was asked by the defense about pre hedging.

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Speaker 1: What is that and how does it complicate the prosecution's case. Yeah,

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Speaker 1: there's a lot of argument about this, But so the

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Speaker 1: idea behind pre hedging is that, well, if you're anticipating

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Speaker 1: a large order being placed by a client and you're

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Speaker 1: going to to buyolog currency in the market in order

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Speaker 1: to make that sale to that client, you might purchase

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Speaker 1: some for your own account in advance, just in case

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Speaker 1: the price starts rising so quickly that you're up having

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Speaker 1: to pay a lot more yourself. The ideas you're sort

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Speaker 1: of in effect stocking up your inventory a bit in

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Speaker 1: advance of the actual purchase and sale for your client.

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Speaker 1: Um and and again you can imagine a legitimate reason

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Speaker 1: to do that, but of course it's also there's a

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Speaker 1: significant gray area between that legitimate form of hetging on

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Speaker 1: one hand, and just out and out front running on

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Speaker 1: the other hand. Lenn, what has been the strongest part

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Speaker 1: of the prosecution's case. I think the strongest part of

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Speaker 1: the prosecution's case for now is the tapes that they

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Speaker 1: have and the some of the quotations that they have

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Speaker 1: from the traders talking about, you know, ramping the price

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Speaker 1: until the clients squeals, um, you know at one point

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Speaker 1: and he exclaims, um, you know effing Christmas. Uh. And

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Speaker 1: so you know, those those do not look good from

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Speaker 1: an optics perspective. But as as your experts said, um,

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Speaker 1: you know, there are very common practices and for an

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Speaker 1: exchange in terms of hedging very large orders. And so

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Speaker 1: I think the battleground in this case is going to

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Speaker 1: come down to those gray areas. At what point does

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Speaker 1: hedging them become something else? At what point does you know, um,

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Speaker 1: HSBC alleged to mislead their client in order to sort

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Speaker 1: of increase or boost that price to the client's disadvantage. So, Bob,

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Speaker 1: how difficult is it for the prosecution to convince the

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Speaker 1: jury that this was not hedging? Well, so, so the

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Speaker 1: issue is actually remarkably similar to that that comes up

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Speaker 1: in connection with the Volker rule. When it comes to

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Speaker 1: the vocal rule. You're trying to distinguish between legitimate hedging

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Speaker 1: behavior on the one hand and proprietary trading on the other. Um.

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Speaker 1: And it's sometimes it's not that difficult to tell them

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Speaker 1: apart you can sometimes tell the intention of a transaction

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Speaker 1: on the basis of sort of surrounding evidence. In this

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Speaker 1: particular case, things are even easier for the prosecution. So,

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Speaker 1: and that's precisely because the language just mentioned right when

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Speaker 1: they're saying, uh, you know, raise up the price, to

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Speaker 1: ramp up the price intil appliance wheels, when they say,

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Speaker 1: oh my gosh, they're not squealing yet epting Christmas, that's

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Speaker 1: pretty good evidence of what the intention was. And oftentimes

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Speaker 1: the intention evidence is the most decides that when it

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Speaker 1: comes to determining whether somebody's engaged in legitimate hedging on

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Speaker 1: the one hand, or something a bit more for audulent

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Speaker 1: on the other len And the prosecution has not had

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Speaker 1: great results, to say the least with these currency cases.

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Speaker 1: Tell us a little bit about that. Sure, the context

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Speaker 1: is very important here. Um. In terms of individuals being

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Speaker 1: prosecuted for crimes, there haven't been any. So while global

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Speaker 1: banks have been fined almost ten billion dollars for manipulation

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Speaker 1: of FX rates, um, there actually hasn't been a single

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Speaker 1: person who's gone to jail. So the stakes I think

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Speaker 1: are very high here. And uh, from my work talking

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Speaker 1: to people in the industry, everyone is watching this extremely

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Speaker 1: closely to see if this is going to be a

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Speaker 1: test case for future prosecutions. But will you explain the

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Speaker 1: way a trader looks at this and weighs the possibility

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Speaker 1: of getting caught, which seems to be on the on

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Speaker 1: the low end, to the possibility of the compensation and

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Speaker 1: the incentives. Yeah. So, Um, the thing about the currency

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Speaker 1: markets is that they're very they're sort of notoriously opaque, right,

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Speaker 1: They're not very transparent, largely because they're constituted by a

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Speaker 1: relatively small number of trading houses. Uh, these aren't sort

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Speaker 1: of open exchanges that are sort of subjected to broad

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Speaker 1: public scrutiny. In fact, even regulatory scrutiny is rather less

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Speaker 1: in ten here than it hasn't many other markets. So

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Speaker 1: it's pretty easy for you know, those who actually worked

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Speaker 1: in these markets to come up with schemes, and easy

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Speaker 1: for them to think that they're not being watched because

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Speaker 1: very oftentimes, uh, they're not. That being said, you know,

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Speaker 1: ever since the foreign exchange scandals broke a couple of

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Speaker 1: years ago, there has been a lot more intense scrutiny

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Speaker 1: of them, and so you really, you know, I suspect

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Speaker 1: that people are being a little bit more careful now.

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Speaker 1: But Mr Johnson, of course was engaged in his his

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Speaker 1: fraudulent behavior, or at least allegedly fraudulent behavior, back before

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Speaker 1: these scandals broke, right back in December. Well, then describe

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Speaker 1: his defense which began today. Well, we've been in the

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Speaker 1: courtroom this morning, and a lot of what has happened

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Speaker 1: is the description of these trading practices as hedging or

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Speaker 1: pre hedging, um, as Bob said, And UM, a lot

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Speaker 1: of it is coming down to the description as standard practice.

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Speaker 1: If you have, you know, an order of billions of pounds,

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Speaker 1: then the desk or the bank that is handling that

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Speaker 1: transaction needs to sort of prepare for instead of trying

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Speaker 1: to do all of that at at once. So um,

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Speaker 1: a lot of it has come down to this is

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Speaker 1: standard practice. There's nothing in foreign exchange that's prohibiting these practices.

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Speaker 1: They point to, Um, government reports and um, you know

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Speaker 1: other other statutes which don't outlaw that the use of

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Speaker 1: this kind of behavior. So UM, a lot of it

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Speaker 1: is coming down to this is business as usual, This

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Speaker 1: is how it was always done. Bob. Is this sort

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Speaker 1: of like insider trading, where you know it's not written

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Speaker 1: down anywhere, and they're the courts are constantly going back

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Speaker 1: and forth about what it is. Uh it is, I mean,

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Speaker 1: the insider trading law actually gets written down, but the

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Speaker 1: problem with it, of course is that it's fairly, very

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Speaker 1: broadly worded, so it's subject to interpretation. And it's essentially

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Speaker 1: the same story here. So it's of dealing with the

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Speaker 1: thirty three or thirty four acts, we're dealing with the

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Speaker 1: Wire Fraud Act, uh, and here to write that the

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Speaker 1: offenses are stated or defined and fairly broad terms, and

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Speaker 1: so it's up to the courts over time to develop

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Speaker 1: a jurisprudence interpreting those terms. UM. I think it's gives

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Speaker 1: the prosecution's empirical claims to what was going on here

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Speaker 1: are correct. It wouldn't be that difficult to show a

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Speaker 1: case of fraud or to make out a case of

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Speaker 1: fraud under the law as its current, as it currently stands.

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Speaker 1: But everything really does end on what precisely they can

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Speaker 1: show actually happened as a matter again that the empirics

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Speaker 1: and Lennon, is it true that the defendant has said

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Speaker 1: that he is going to take the stand or his

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Speaker 1: defense counsel has said that he's going to take the stand. Yes,

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Speaker 1: they said that this morning. So, um, that will be

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Speaker 1: extremely interesting to hear in his own words, Um, you

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Speaker 1: know what he thinks that went on, and to hear

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Speaker 1: him defend himself. Bob, that is a very risky scrat strategy,

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Speaker 1: would you say, yes, it certainly can be. I mean,

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Speaker 1: as you know, right, the so called farmer broke case

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Speaker 1: with Mr Scrawley, it is almost the poster child case

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Speaker 1: for for the dangerous now right. If you if you

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Speaker 1: appear arrogant, if you appear impatient with the court for

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Speaker 1: its tesky interference with your profit seeking behavior, you can

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Speaker 1: very quickly alienate either a jury or a judge. On

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Speaker 1: the other hand, if you're able to kind of come

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Speaker 1: across being composed and you seem um relatively innocense, um,

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Speaker 1: not like a kind of a criminal, that it can

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Speaker 1: be helpful as well. Lennon, do we know how long

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Speaker 1: the trial is expected to last? We think it's going

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Speaker 1: to be another two weeks June. At the beginning of

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Speaker 1: the case they said it was going to be roughly

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Speaker 1: a month, and so two weeks have elapsed, so probably

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Speaker 1: another couple of weeks. All right, Well, thank you both

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Speaker 1: for being on Bloomberg Law. That's them new Bloomberg FX

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Speaker 1: reporter and Bob Hocket, Professor at Cornell University Law School,