U.K.-based global financial services company HSBC Holdings will pay a total of $101.5 million, including a $63.1 million criminal penalty and $38.4 million in disgorgement and restitution, to resolve charges that it engaged in a scheme to defraud two bank clients through a multi-million dollar scheme commonly referred to as “front-running.”

The payment reflects a 15% reduction in the fine amount in recognition of HSBC’s cooperation during the investigation and its extensive remediation. The bank also entered into a three-year deferred prosecution agreement (DPA), filed in connection with a two-count criminal information charging wire fraud in the U.S. District Court for the Eastern District of New York. The DPA is pending review by the court.   

“HSBC’s admissions in connection with this resolution confirm that the company misused confidential client information for its own profit on more than one occasion,” said Acting Assistant Attorney General John Cronan.

According to HSBC’s admissions, on two separate occasions in 2010 and 2011, traders on its foreign exchange desk misused confidential information provided to them by clients that hired HSBC to execute multi-billion dollar foreign exchange transactions involving the British Pound Sterling. After executing confidentiality agreements with its clients that required the bank to keep the details of their planned transactions confidential, traders on HSBC’s foreign exchange desk transacted in the Pound Sterling for the traders and HSBC’s own benefit in their HSBC “proprietary” accounts. 

HSBC traders then caused the large transactions to be executed in a manner designed to drive the price of the Pound Sterling in a direction that benefited HSBC, and harmed their clients.  HSBC also made misrepresentations to one of the clients, Cairn Energy, to conceal the self-serving nature of its actions. In total, HSBC admitted to making profits of approximately $38.4 million on the first transaction in March 2010, and approximately $8 million on the Cairn Energy transaction in December 2011.

Since that time, HSBC said in a statement that it has introduced "a number of measures designed to make the control environment in its global markets business more robust." HSBC’s improvements in this area include, among other things:

Implementing algorithmic trading to manage risk around benchmark orders;

Updating its policies for sales, pricing, order handling, managing confidential client information and conflicts of interest, pre-hedging, and market abuse; and

Engaging outside firms to audit its internal controls and to enhance its trade, voice, and audio surveillance.

Under its agreement with the Justice Department, HSBC agreed to pay a criminal penalty of $63.1 million. HSBC also agreed to continue to cooperate with the Department and with foreign authorities in any ongoing investigations and prosecutions relating to the conduct (including of individuals), to enhance its compliance program, and to pay $38.4 million in disgorgement and restitution for its conduct related to one of the two victim companies. HSBC previously settled with the other victim company, Cairn Energy, for approximately $8 million, which the Justice Department credited as full restitution for Cairn.

The Department said it reached this resolution based on a number of factors, including:

The approximately $46.4 million that HSBC gained from the offense;

The bank’s remedial measures to date, including dedicating significant resources to improving its systems and controls and terminating the employment of employees involved in wrongdoing; and

The bank’s commitment to continuing to enhance its compliance program and internal controls. 

HSBC did not receive credit for voluntarily disclosing the misconduct, but did receive "substantial cooperation credit because, although as detailed in the DPA, the bank’s initial cooperation with the government’s investigation was deficient in certain respects, after being notified of the Department’s concerns, HSBC changed course and its cooperation improved substantially," the Justice Department stated.

In connection with the government’s investigation, Mark Johnson was charged in August 2016 with one count of conspiracy to commit wire fraud, as well as 10 counts of wire fraud stemming from the Cairn Energy transaction. Johnson, the former head of foreign exchange cash trading at HSBC, was found guilty on Oct. 23, 2017 of one count of conspiracy and eight counts of wire fraud after a four-week jury trial in Brooklyn, New York. His sentencing is scheduled for Feb. 15, 2018.

This agreement follows earlier settlements relating to HSBC’s FX trading business with the U.K. Financial Conduct Authority and U.S. Commodity Futures Trading Commission in November 2014 and with the U.S. Federal Reserve Board in September 2017 related to controls and procedures.