United States v. Johnson: Implications for the Industry

Similar documents
Is your investment management company regulated by the US CFTC?

Follow this and additional works at:

Interest Rate Risk Management Refresher. April 27, Presented to: Section I. Basics of Interest Rate Hedging?

Practical guidance at Lexis Practice Advisor

ADOPTING THE AUGUST 2012 ISDA PROTOCOL FOR DODD FRANK SWAP REQUIREMENTS

Derivatives: How Do They Impact Your Client?

Dodd Frank Update: Impact on Gas & Power Transactions

Lance A. Zinman. Partner West Monroe Street Chicago, IL Practices

FR _CHEVRON AND/OR TEXACO TECHRON ADVANTAGE VISA CARD T&C-DC PDF [19834C] 03/16

Interest Rate Risk Management Refresher. April 29, Presented to: Howard Sakin Section I. Basics of Interest Rate Hedging?

CONNECTED PARTY TRANSACTIONS

Memorandum. Independent Amount Segregation: Summary of ISDA s Sample Tri-Party IA Provisions

MORGAN STANLEY - COMMODITIES. Commitment of Traders Report: Energy Dissaggregated Futures and Options Combined - Week Ending 10-Mar-2017

CFTC Proposes First Clearing Mandate and Finalizes Phased Compliance Rules

The road to reform. Helping commercial end users of OTC derivatives comply with Dodd-Frank s Title VII

Breakfast Seminar Competition Law and the Financial Services Sector

[Date] IMPORTANT: ACTION REQUIRED

Futures & Derivatives Law

FR INFINITI VISA CREDIT CARD T&C DC PDF 37472D 12/18

Foreign Exchange Dealing & Business Practices Disclosure

Lobbyist Laws May Significantly Impact Marketing of Funds and Advisory Services to California and New York City Plans in 2011

SJA FINANCIAL ADVISORY, LLC

United States District Court, N.D. Illinois, Eastern Division. No. 05 C (N.D. Ill. Nov 30, 2005) Decided November 30, 2005

... N.C. Office of Indigent Defense Services. PAC and Expert Spending in Potentially Capital Cases at the Trial Level.

Information Statement & Disclosure for Material Risks

Claims Traders Beware: More Risk Than You Bargained For!

1THE WALL STREET JOURNAL1

ISDA CONFIRMATION. 2. The terms of the particular Transaction to which this Confirmation relates are as follows:

1. Investment contracts, 2. Notes, 3. Evidence of indebtedness, 4. Options on a security, or 5. Instruments commonly known as a security.

REQUEST FOR PROPOSAL INVESTMENT MONITOR/ CONSULTANT

Global Portfolio Flows and Impact on European Markets Investment Implications of a Low Yield Environment

Dodd Frank and inter affiliate trading of derivatives

COMMENTARY. Potential Impact of the U.S. Dodd-Frank Act JONES DAY

Memorandum. Recommendation. Background/Discussion. Fraud at New York State Common Retirement Fund

/27/2017 RISK DISCLOSURE STATEMENT FOR FOREX TRADING AND IB MULTI-CURRENCY ACCOUNTS

FR CHEVRON AND/OR TEXACO TECHRON ADVANTAGE CREDIT CARD T&C PLCC PDF 33425A 3/18

CAD 15 million Callable Zero Coupon Notes due 17 May 2041 Final Terms & Conditions

SIMPLIFIED PROSPECTUS MAY 4, 2018

On July 21, 2010, President Obama signed into law the Dodd-Frank

PENNSYLVANIA TURNPIKE COMMISSION POLICY AND PROCEDURE

Negotiating the ISDA Master Agreement

Regulation of Private Funds and Their Advisers Under the Dodd-Frank Wall Street Reform and Consumer Protection Act

25, 2011 PONZI SCHEMES: US LAW OVERVIEW

ISDA/Markit Collaboration on Dodd- Frank Protocol and Relevance to Asia

PRACTICAL IMPLICATIONS

This APR will vary with the market based on the Prime Rate.

Increased Regulation of Private Fund Managers and Other Money Managers under the Advisers Act

Does a Taxpayer Have the Burden of Showing Intent to Divert Corporate Funds as Return of Capital?

CHARTIS. Name of Insurance Company to which Application is made (herein called the Insurer ) HEDGE FUND INSURANCE APPLICATION

Derivatives Hedge Funds Face Increased Margin Requirements Under Final Swap Rules (Part One of Two)

UBS AG, et al.; Notice of Application and Temporary Order. Agency: Securities and Exchange Commission ( Commission )

CORPORATE GOVERNANCE ADVISORY

SYNCHRONY BANK RATES AND FEES TABLE WALMART MASTERCARD ACCOUNT AGREEMENT PRICING INFORMATION SECTION II: RATES, FEES AND PAYMENT INFORMATION

SECTION II: RATES, FEES AND PAYMENT INFORMATION

Hedge Fund-of-Funds Investment Policy Investment Policy Statement Template

CASE NO. 1D Pamela Jo Bondi, Attorney General, and Michael McDermott, Assistant Attorney General, Tallahassee, for Appellee.

Time-Limited No-Action Relief for Agents from the Post-Allocation Swap Timing Requirement of 45.3(e)(ii)(A) of the Commission s Regulations

FR CRATE AND BARREL AND/OR CB2 MASTERCARD DC TC PDF 37497C 12/18

SANTA BARBARA COUNTY EMPLOYEES RETIREMENT SYSTEM POLICY REGARDING PLACEMENT AGENT DISCLOSURE INFORMATION

HSBC USA INC. HSBC BANK USA, N.A. CHARTER OF THE COMPLIANCE AND CONDUCT COMMITTEE

SYNCHRONY BANK RATES AND FEES TABLE PAYPAL CASHBACK MASTERCARD ACCOUNT AGREEMENT PRICING INFORMATION

TEXAS DEPARTMENT OF HOUSING AND COMMUNITY AFFAIRS. INTEREST RATE SWAP POLICY As presented to the Board on April 26, 2018

PA TURNPIKE COMMISSION POLICY

Federated MDT Large Cap Value Fund

WHITE COLLAR, SECURITIES ENFORCEMENT, AND GOVERNMENT INVESTIGATIONS

UNDERSTANDING GFI BROKERING SERVICES

UNIVERSITY OF KENTUCKY Office of the Treasurer

NOT RECOMMENDED FOR PUBLICATION File Name: 16a0037n.06. Nos /2488 UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT ) ) ) ) ) ) ) ) ) ) )

Bulletin Litigation/Mergers & Acquisitions

Looking Forward: Private Placements in the Post Credit Crisis World

RESOLUTION WHEREAS, the Board of County Commissioners of Broward County,

SUMMARY PROSPECTUS May 1, 2018

BlueBay Order Execution Policy

Averaging solutions. A guide to trading and hedging average prices on the London Metal Exchange SETTING THE GLOBAL STANDARD

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT $5,723,000 Callable Step-Up Fixed Rate Notes due January 30, 2027

M&A Trends. The ABA Deal Points Study and Tales from the Front Lines. Paul Johnson, July 10, Partner

AFME Standard Form. Plan of Distribution

CURRICULUM VITAE. SHARON L. McCARTHY (212)

Bona Fide Hedge Exemptions for Commodity Swap Dealers

Ponzi Scheme. Finance (basics) Student: Vildana Karalid ; Professor: Ludek Benada

CFTC s and U.S. Prudential Regulators Margin and Segregation Rules for Uncleared Swaps Definition of Financial End User

Public Finance Client Alert

A. Contracts considered in the context of construction projects. 3. Particular forms of agreement unit price, T&M, Design/Build.

National Association of Independent Public Finance Advisors P.O. Box 304 Montgomery, Illinois Fax

Carolyn H. Jackson. Partner London p +44 (0) Practices. Memberships. Industries.

Client Alert July 3, 2014

Treasury Management Policy

An Update and Overview of U.S. and Canadian Derivatives Reform

Thomas W. Curvin. P: E:

Investment Management Alert

This APR will vary with the market based on the Prime Rate.

Insights for fiduciaries

Chapter 5. Commodity Pools

Summary of the Volcker Rule Study Hedge Funds and Private Equity Funds

FORM ADV. Primary Business Name: EXCELSIOR OPPORTUNITY ADVISORS LLC CRD Number: Other-Than-Annual Amendment - All Sections Rev.

DISTRICT COURT OF APPEAL OF THE STATE OF FLORIDA FOURTH DISTRICT

ISDA International Swaps and Derivatives Association, Inc.

SEC Proposes New Standard of Care for Broker-Dealers: Overview and Considerations for Investment Professionals

ABC Fund Limited Operational Certification Summary Report

SEC Provides Relief to Security-Based Swap Dealers From Business Conduct Rules

Transcription:

October 4, 2018 Financial Markets Lawyers Group This presentation is made for educational purposes only and does not constitute legal advice and should not be relied upon in connection with any transaction or other purpose. makes no warranty or representation as to the accuracy of any information contained herein.

Former HSBC Executive Convicted of Fraud for Front-Running: Mark Johnson Found Guilty on Nine Counts Related to a $3.5 Billion Currency Trade Wall Street Journal, October 23, 2017 The DOJ charged Mark Johnson (HSBC s global head of FX trading) and Stuart Scott (HSBC s European head of FX trading) with wire fraud, for front-running its counterparty Cairn Energy in a $3.5 billion cable fixing order HSBC and Cairn entered into an NDA and, subsequently, a Mandate Letter, which set forth the terms of HSBC s engagement The Mandate Letter provided that the transaction would be governed by an ISDA agreement, which in turn provided that HSBC and Cairn were transacting on a principal-toprincipal basis The government contended, and the trial court agreed, that a fiduciary relationship could exist between HSBC and Cairn based on best execution -like assurances that Johnson and Scott made to Cairn during the RFP process On October 23, 2017, Johnson was convicted on eight wire fraud counts and one conspiracy count, and acquitted of one wire fraud caught. Johnson was sentenced to 24 months imprisonment. Johnson has appealed his conviction. 2

Did HSBC Act as a Principal or as a Fiduciary The DOJ s Case HSBC executed an NDA with Cairn during the RFP process, promising that it would not use its knowledge of Cairn s position for any purpose other than executing Cairn s trade Johnson and Scott also assured Cairn that it would drip feed its purchase of Sterling to avoid spiking the fixing price More broadly, HSBC s RFP response said that HSBC would execute the trade in the best interest of Cairn In connection with the NDA, HSBC walled off the traders executing the Cairn trade from others at HSBC. Despite this wall, Johnson allegedly instructed those on the other side of the wall to trade ahead of the fix Conduct by Johnson during and after the trade also suggests a guilty conscience Johnson instructed traders to buy Sterling in large volume just before the fixing by using coded language ( My watch is off ) Johnson then told Scott on a subsequent phone call: I think we got away with it. 3

Did HSBC Act as a Principal or as a Fiduciary Johnson s Case Cairn hired Rothschild & Co. to act as its financial advisor in the transaction, and Johnson disclosed to Rothschild during the RFP process that HSBC would try to profit by purchasing Sterling ahead of the fix After it won Cairn s business and after making the assurances that the DOJ relied upon, HSBC and Cairn executed a Mandate Letter, in which Cairn acknowledged that HSBC s purchase of Sterling prior to the fix might cause adverse price movement The Mandate letter incorporated by reference an ISDA agreement that made clear that HSBC was dealing with Cairn as a principal and was not acting in an advisory or fiduciary capacity Cairn also conceded, after the trade, that it had expected HSBC would try to make a fair profit by beating the fix. 4

Implications: Should Courts Disregard Contractual Waivers of Fiduciary Duty? Johnson made several statements to Cairn regarding when and how HSBC would execute, in order to assure Cairn that HSBC would attempt to maximize value for Cairn After receiving these specific assurances, Cairn executed a Mandate Letter and an ISDA agreement, acknowledging a risk that HSBC s purchase of Sterling would move the market against Cairn, and agreeing that HSBC was not acting in a fiduciary capacity Read narrowly, this implies that very specific assurances cannot be negated by subsequent, general disclosures More controversially, it invites courts to scrutinize the conduct of a trade in order to decide whether to honor the terms of an ISDA agreement. But standardized agreements such as ISDAs exist, in part, to minimize the risk of these sorts of fact-specific examinations 5

Implications: Constraints on Arms-Length Dealing Recent legal, regulatory and industry guidance all suggest that dealers may need to observe a fairness requirement even when trading as a principal Johnson s conviction and the ongoing Bogucki case both premise fraud convictions on assurances made in the context of an arms-length relationship CFTC has suggested a fair-dealing standard should apply to communications from swap dealers / major swap participants NYDFS settlements have imposed what amounts to a fair dealing requirement on FX dealers The FX Global Code refers to counterparties as clients, places strict limits on dealers permissible pre-hedging, and requires fairness in pricing, among other things 6

, 31 West 52nd Street, New York, NY 10019-6131, USA 2015 US LLP