HSBC is facing a fresh legal battle over allegations that its traders manipulated foreign exchange markets for their own profit at the expense of their clients, with the allegations centring on trades from more than a decade ago.
ECU Group, a UK-based currency investment firm, has filed an application to London’s commercial court asking for HSBC to be required to hand over records relating to three large foreign exchange orders it executed in 2006.
The court filing — seen by the Financial Times — comes after regulators uncovered systematic rigging of the $5tn-a-day foreign exchange market by traders at HSBC and several other global banks, which were fined $4.3bn three years ago.
At the time of ECU’s 2006 forex trades, the firm suspected it was being ripped off by HSBC traders “front running” its forex orders. When it complained, the bank promised a full internal inquiry, only to report back that it had found no wrongdoing.
Although ECU was convinced it was a victim of foul play by the way the market appeared to systematically move against it within minutes of each large order it placed, the firm was persuaded by the bank to let the matter drop.
However, it recently decided to return to the fray after the US Department of Justice charged two of HSBC’s top forex traders with “front running” a client’s trade last year, arresting one as he landed at New York’s John F Kennedy airport.
The DoJ issued the arrest warrants despite the fact that the bank had hired law firm Cleary Gottlieb to carry out a review of its forex trades — including the deal the two traders were accused of cheating on — and found no breaches of its code of conduct.
That was the last straw for ECU, which decided that it now had grounds to doubt the findings of the internal investigation carried out by HSBC into its trades in 2006.
In response, the firm filed an application for pre-action disclosure — a fact-finding step ahead of a potential full lawsuit. It is asking the judge to require HSBC to hand over records that the bank has failed to provide voluntarily.
While a statute of limitations usually prevents legal action being taken more than six years after an event, this can be waived if a court finds evidence of “concealment” by the defendant of the original wrongdoing.
ECU is asking for HSBC’s interbank dealing tickets, deal log entries and any relevant Bloomberg instant messages for the three trades, including those of its London and New York proprietary trading desks.
It is also seeking all documents relating to the internal inquiry carried out by the bank to investigate ECU’s original complaint.
HSBC and ECU declined to comment.
The firm’s three “stop-loss” trades — each worth over $100m — were designed to limit its downside by committing to sell one currency and to buy another if the exchange rate passed a pre-determined threshold.
Each time ECU placed an order, the rate moved sharply up to the stop-loss level — triggering the trade to be executed — and then the rate quickly retreated again.
The court filing shines another spotlight on the record of Stuart Gulliver, HSBC’s chief executive, who was responsible for forex trading as head of its investment bank before taking his current post in 2011.
In 2014, the bank paid a $618m fine to US, UK and Swiss regulators for its involvement in the forex rate-rigging scandal. It is still being investigated by the DoJ for allegedly rigging the market.
The arrest warrants issued by the DoJ last year were for Mark Johnson, HSBC’s global head of forex cash trading, and Stuart Scott, its former head of forex cash trading for Europe, the Middle East and Africa. Mr Johnson pleaded not guilty and was released on bail. Mr Scott, who lives in the UK, has denied wrongdoing through his lawyer.
The US authorities accused them of cheating the energy group Cairn by deliberately buying sterling for HSBC’s own accounts, generating a profit by pushing up the price ahead of a $3.5bn sterling purchase the bank executed on behalf of Cairn.
The DoJ said in its complaint that when Mr Johnson was told of Cairn’s decision to go ahead with the trade, he responded: “Ohhh, f***ing Christmas.”