Johnson set to take stand today

Mark Johnson, the former HSBC executive standing trial for 10 counts of alleged wire fraud, is set to take the stand today to testify in his defence, following a day of high drama on October 10 when key defence expert witness Kevin Rodgers’ analysis showing a ‘Russian name’ in the market was disallowed by the presiding judge.

The tension came after Mark Johnson’s defence attorney Frank Wohl, from law firm Lankler Siffert & Wohl, alerted Judge Nicholas Garaufis that Rodgers, the former global head of foreign exchange at Deutsche Bank, had found evidence of an HSBC salesperson executing a £15 million ($18 million) trade around the same time of the $3.5 billion Cairn Energy’s order shortly before 3pm on December 7, 2011.

The surprise news of the discovery by Rodgers was the final straw for Garaufis, who sent the jury for an early lunch and walked away from his bench following a string of unexpected news during the morning session.

Russian name resurfaces

Wohl told the judge he intended to question Rodgers about the “Russian name” that kept floating around in the case since government witness Dipak Khot passed along information or speculation to Cairn concerning a Russian trade at the time.

“It’s speculative. … Only now we are hearing about this Russian trading. We think it’s too speculative to admit it and unfairly prejudicial,” said attorney Brian Young for the US.

Wohl explained to the judge that Khot was the one who said he was told by HSBC cable head Frank Cahill or Stuart Scott, a co-defendant in the case, about the Russian involvement.

“Here’s a guy sitting 10 feet away who got that trade. It goes to the foundation of what Khot said. It’s only after asking a lot of questions we learned about this late in the game,” Wohl said. “It’s a result of [Rodgers] reviewing information and looking to see if there’s any idea to support a Russian trade.”

Wohl said the team sourced tape recordings and listened for any information concerning a Russian trade. They found conversations of a “Moscow guy who did 15 quids at 42”. Wohl, who said he found out about the tape at the end of August, said data showed the trade existed.

Judge loses temper

After listening to one of the tapes, Garaufis’ frustration grew further following an already fraught morning, when he learned that the government and the defence are disputing whether some materials and analysis done by Rodgers are covered by attorney-client privilege and work order doctrine, and, therefore, shouldn’t be turned over to the prosecution.

“I’m getting one surprise after another. Why do I get it in the middle of the witness testimony? This is not how I do business. This is not how the court works. This is very distressing,” Garaufis said.

“It’s not fair. It’s not fair to me or the government. I’ve got a jury sitting in the jury room. This could have been resolved long before this. I’m not going to listen to this,” he added. Garaufis left the room, leaving both the government and the defence – and the attendees – stunned and looking at each other.

When he returned to the bench an hour later, Garaufis told the defence he would not allow them to “bootstrap” the speculation of Russian activity in the market. He added that the information shouldn’t be allowed to enter the court through Rodgers “because it gives it credence” and suggested that the salesman himself should come in to testify about it.

“It seems to me Mr Rodgers is experienced in this kind of input,” said Wohl.

“So you’re going to have an enquiry on all the rumours that go on on a trading floor?” asked Garaufis, adding that the trade in question was a small one that wouldn’t have much market impact.

“Isn’t that what the government’s case is based on?” asked Wohl.

“I have no idea,” said the judge.

Wohl responded that if the government didn’t think Khot’s testimony was important they wouldn’t have included it in the case, and that “the jury needs to hear the whole thing”.

“I don’t think this is the witness for it. It gives greater weight than it deserves,” the judge later said.

Beneficial to Cairn

After the exchange, Rodgers resumed his testimony by telling the court that the way HSBC traders carried out the £2.25 billion order was beneficial to Cairn.

“It was [beneficial] because the way very large fixings are transacted, to the extent that pounds were bought earlier in the day, market pressure was reduced because there were fewer pounds to buy [at the fix],” Rodgers said.

He added that data showed that all the pounds bought throughout the pre-hedging period and throughout the fix were turned over to Cairn.

“Buying all the pounds before is a poor idea. Buying in the fixing window is a poor idea for the client. Buying some before, it’s a compromise between the two extremes,” Rodgers said.

His analysis – assisted by consultants at Cornerstone and Hugh Clark, a Cambridge-educated mathematician – showed that 11 traders in New York and London turned over all their trades to Cahill, who managed the bulk of the trade.

Rodgers also explained the pace of HSBC’s accumulation of the pounds, telling the court that in the first phase of the trade around 13:30 to 14:24 that day, traders were buying £3.6 million a minute. Had they continued at that pace, Rodgers said only £275 million could have been bought, which was a fraction of the large order.

In phase two, which took place between 14:25 and 14:59:59, traders began buying £20.2 per minute. If they had carried on at that pace, they would have acquired only £980 million, said Rodgers, pointing out that this wasn’t enough to fill Cairn’s order.

Rodgers said in the last five minutes, Cahill started to accumulate pounds at more rapid pace as the bank had £800 million left to buy. 

“At the end of the fixing window they had exactly the amount of pounds – ever so slightly over,” Rodgers said.

Bigger, longer, worse

Cahill testified earlier that he slightly overshot the mark because of a delay in his system. Rodgers said these delays happen when there are a lot of trades taking place.

Rodgers later delved deeper into his analysis, sharing with the court some market information and colour that then UK chancellor George Osborne was speaking at the time of the Cairn trade and that there was “nervousness” around the eurozone as well, causing liquidity to be withdrawn from the market.

Rodgers added that Cahill used a variety of trading techniques – including the iceberg algorithm, to cloak his full hand – to execute the rest of Cairn’s order of over £1 billion before the fix, which he said was not consistent with an overly aggressive push in the market.

“It’s the opposite of what you would expect from somebody trying to push the price point,” Rodgers said.

Rodgers also looked at all the orders in the market, and told the court ignoring orders meant ignoring the context of how the transaction was executed.

“Orders allow you to see what he was doing, when and how,” Rodgers said.

He added that the risk HSBC took on as a result of buying the pounds was between $1.7 million and $4 million. He also told the court of the volatility in sterling on December 8, of 64 pips in a quarter of an hour; 122 pips in an hour on December 2; and 158 pips in an hour on October 6.

“They were in the last quarter of the year. What would have happened to HSBC’s position if what happened on December 8 happened to HSBC when they had a quarter of an hour to go?” he said.

“The bigger, the longer, the worse,” said Rodgers. “I think it was a reasonable commercial, fair outcome for both parties,” he told the court.

As for the $8 million profits, which the government alleged was improperly gained through front-running, Rodgers said his analysis showed that the bank got between $6.7 million and $7.5 million. Had the client opted for an “at best” trade on its £2.25 billion order, Rodgers said the profit would have been $1.2 million, while the “full risk transfer” would have cost Cairn $9 million.

“The profit HSBC made on the deal lies between the two extremes,” Rodgers said, adding that the 20 basis points made was within compliance guidelines for what was appropriate.