New York/London: An India link has emerged in the alleged $3.5-billion forex trading fraud case at British banking giant HSBC, where two senior executives have been accused of doing 'front-running' by cheating a client that was selling part-stake in an Indian subsidiary.
The duo has been charged in the US of "conspiracy to commit wire fraud" while the client in question has been identified in media reports as Cairn Energy, which had sold an ownership stake in its Indian subsidiary Cairn India for $3.5 billion in 2010 and wanted to convert it into sterling to distribute cash to shareholders.
Cairn had selected HSBC to conduct the forex conversion transaction from amongst ten banks it had asked to bid for the right while asking them to sign a 'confidentiality agreement' regarding the information about the transaction.
One of the two persons, HSBC Bank's head of forex cash trading Mark Johnson, was arrested on Tuesday night at New York airport but was released on a $1 million bail amount on Wednesday.
Johnson has been charged for trading ahead of his client to make millions of dollars, while similar charges have been levelled on Stuart Scott, who formerly served as HSBC's head of forex cash trading for Europe, Middle East and Africa but left the bank in December 2014.
The US Department of Justice said in a statement that the two have been charged with conspiring to defraud a client of HSBC through a scheme commonly referred to as 'front running' -- a practice in which traders fraudulently conduct trades with advance information about an impending deal.
While the Department did not disclose the name of the client, the British media reports identified it as Cairn Energy, which had indeed sold a majority stake in its Indian subsidiary to Vedanta Resources and was to distribute $3.5 billion worth sale proceeds among its shareholders.
As per the court documents made public by the Department, "In approximately 2010, the victim company entered into an agreement with another company to sell part of its ownership interest in an Indian subsidiary for approximately $3.5 billion.
"Execution of the sale was dependent upon regulatory approval in India. If the sale was approved, the victim company planned to convert approximately $3.5 billion in sale proceeds into Sterling, which it intended to distribute to its shareholders."
HSBC was later mandated by Cairn for carrying out the foreign exchange transaction and also signed a confidentiality pact, but the duo conspired to buy sterling "in advance of the transaction, knowing that the transaction would cause the price of sterling to increase, thereby generating substantial trading profits for HSBC and the defendants".
In the market parlance, this practice is called 'front running' and is against the market regulations.
The two have also been charged of executing the purchase transactions in such a manner as to "cause the price of sterling to spike" at the expense of the 'victim company', which was later sold sterling at the higher price.
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