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Secret code set in motion HSBC currency front-running: US prosecutors

[MANHATTAN] With just four words, Mark Johnson allegedly passed a secretive signal to fellow HSBC Holdings Plc currency traders to launch a buying spree of pounds: "my watch is off".

The bank's former global head of foreign exchange alerted the traders around the globe via a phone call in December 2011 that was recorded, a prosecutor said Thursday. The gambit was designed to take advantage of a US$3.5 billion client order to buy sterling, the US says.

After Johnson's trial recessed for the day, prosecutor Carol Sipperly asked that the jury hear the recordings on Friday, in which Johnson allegedly tipped off a trader in Hong Kong. That signal eventually reached others on both sides of the Atlantic, she said. Johnson was in New York that day, speaking to Stuart Scott, the bank's former head of currency trading in Europe, who was in London, just before the transaction for its client, Cairn Energy Plc.

Prosecutors say Johnson and Scott, along with other traders, bought pounds before the transaction. Johnson is on trial in federal court in Brooklyn, New York, accused of a scheme that produced a US$8 million profit for his bank."We actually have Mark Johnson telling Stuart Scott 'Tell Ed my watch will be off,'" Ms Sipperly said. "We have communications where the word 'watch' is used, and then within seconds, 20 seconds of 'my watch is off,' we have all that trading that's been described. The word is instrumental in getting the information to the traders when it comes to their early front-running trades."

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Earlier in court, prosecutors showed jurors charts of the trading by Johnson, Scott, four traders in New York and five traders in London that day, showing they made about US$3 million in profit. Rob Sherman, a spokesman for HSBC in New York, didn't have an immediate comment.

Johnson's lawyer John Wing argued the tapes shouldn't be aired at the trial because his client used the term "watch" to mean something entirely differently. "'My watch is off' is a code designed to tell people keep this confidential, don't let the salesmen know about it," Mr Wing said.

US District Judge Nicholas Garaufis, who hasn't ruled on the government's request, told lawyers he would listen to the recordings and issue a ruling Friday."I'm an expert in conspirators, all right," Mr Garaufis said. "You can be a conspirator by just putting your finger on your ear lobe to indicate assent in a Mafia case. You don't have to say a single word."

HSBC was hired by Cairn to convert the proceeds of a unit sale from dollars into pounds. While the bank promised it would be a "drip feed" transaction, prosecutors say instead that about 90 minutes before the trade that was to occur, Johnson and Stuart Scott bought pounds ahead of the trade and tipped off other currency traders at the bank.

The defense suggested in questioning that the spate of buying by these other men at the bank was an attempt to help Frank Cahill, the former HSBC currency trader who was fulfilling Cairn's order.

But Ross Waller, a former trader at Bridgewater Associates who testified as an expert witness for the government, said Thursday that Mr Cahill's feverish demand for pounds, compounded with the frenzied buying by the other traders, ended up dominating about 75 per cent of trading in the five minutes before the Cairn trade was to be executed and caused the pound's price to jump. Trading records also indicate the others weren't selling to Cahill to help him fill the order, Mr

Waller said.

The case is US v Johnson, 16-cr-457, US District Court, Eastern District of New York (Brooklyn).

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