By Nate Raymond
NEW YORK (Reuters) - A senior HSBC Holdings Plc <HSBA.L> manager has been arrested and charged alongside a former foreign exchange executive with engaging in a scheme to front-run a $3.5 billion transaction by one of the bank's clients, U.S. prosecutors said on Wednesday.
Mark Johnson, HSBC's global head of foreign exchange cash trading in London, and Stuart Scott, its ex-head of cash trading for Europe, the Middle East and Africa, were charged in a criminal complaint filed in federal court in Brooklyn.
Both men were charged with wire fraud conspiracy, in a case that a person familiar with the matter said was the first against individuals to flow out of a U.S. Justice Department probe of foreign-exchange rigging at global banks.
A lawyer for Johnson declined comment, while an attorney for Scott could not be identified. Robert Sherman, an HSBC spokesman, said the bank is cooperating in the Justice Department's foreign exchange investigation.
Prosecutors said Johnson, 50, and Scott, 43, misused information provided by a client who had hired HSBC to convert $3.5 billion to British pounds in connection with a planned sale of one of the unnamed company's subsidiaries.
The two British citizens then used their insider knowledge to engage in a process called front-running in which they made trades ahead of the December 2011 transaction, resulting in a spike in the price of the currency that was detrimental to HSBC's client, prosecutors said.
"Ohhh, f---ing Christmas," Johnson told Scott in a recorded call the day the transaction went through, the complaint said.
In total, HSBC earned $3 million from trades its FX traders placed and earned $5 million executing the transaction, the complaint said.
"The defendants allegedly betrayed their client's confidence, and corruptly manipulated the foreign exchange market to benefit themselves and their bank," Assistant Attorney General Leslie Caldwell said in a statement.
Johnson was arrested at John F. Kennedy International Airport on Tuesday night and was released on Wednesday on a $1 million bond following a court hearing.
Frank Wohl, Johnson's lawyer, in court told a judge that Johnson had been in the process of moving to the United States with his wife and six children after being transferred by HSBC.
The case was, according to a source, related to a years-long Justice Department probe that has led to four banks last year pleading guilty to conspiring to manipulate currency prices.
The charges came a day after the Federal Reserve Board said it was banning Matthew Gardiner, a former FX trader at Barclays Plc <BARC.L> and at UBS AG [UBSAG.UL], from participating in the banking industry for manipulating pricing benchmarks.
HSBC was not among the four banks that pleaded guilty, but in 2014 agreed to pay $618 million to resolve related probes by U.S. and British regulators.
The Justice Department has continued to investigate, and HSBC has set aside $1.2 billion to cover various forex-related probes, according to a regulatory filing.
The case is U.S. v. Johnson et al, U.S. District Court, Eastern District of New York, No. 16-mj-0674.
(Reporting by Nate Raymond in New York and Sruthi Shankar in Bengaluru; Editing by Meredith Mazzilli and Matthew Lewis)