Barclays Trader Beats U.S. Prosecution of Front-Running Charges

Published on:
March 5th, 2019
Photo Credit: Michael Nagle/Bloomberg

Allegations of criminal market manipulation against a Barclays Plc foreign-exchange trader were tossed in the middle of a trial by a judge, who determined that U.S. options markets are more akin to a poker game in “the Wild West” than one governed by clearly defined rules of trust.

The judge took the rare step of shutting down the trial of Robert Bogucki before it reached a jury. The ruling in favor of the head of Barclays foreign-exchange trading in New York is a setback for U.S. prosecutors who’ve struggled in a broader crackdown targeting individual bankers for currency market manipulation.

U.S. District Judge Charles Breyer in San Francisco concluded there’s no way, based on the case the government built, that jurors could conclude that London-based Barclays or Bogucki owed Hewlett-Packard Co. -- whose options he was trading -- a duty of trust or confidence.

“The parties bluffed and ‘BS-ed’ each other, operated as principals, looked out for their own interests, and understood the other party to be ‘posturing,’ rather than providing strictly true information,” Breyer wrote in his ruling.

Prosecutors argued that Bogucki depressed the value of Hewlett-Packard’s options by front-running, or trading for the benefit of the bank’s own books, ahead of its handling a massive unwind of similar options for HP, thereby profiting the bank at the company’s expense.

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The judge’s decision to pull the plug on the prosecution reflected doubts that had been gnawing at him as the trial progressed.

“I’m having a hard time to see that the criminal law is really addressed to this sort of thing, this sort of practice, especially when the practice seems to be so, little bit, Wild West out there in terms of options trading,” Breyer said during the middle of the trial, after the jury had gone home for the day.

The U.S. had tried to convince the jury that conversations, instant chats and emails among Bogucki and his cohorts -- ranging from the ordinary to the profane -- pointed to a conspiracy to manipulate the options market. One trader had been quoted in a chat with Bogucki promising to “spank the market” and “bash the sh-t out of the market.” Bogucki’s defense was that those conversations were taken out of context.

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Bogucki’s lawyer argued that contracts and agreements between the two sides clearly spelled out their roles. The pre-positioning trades Barclays and Bogucki made ahead of the unwind were done to hedge against the bank’s risk exposure, he argued.

For the government, the lesson of Bogucki’s win is that traders have an advantage defending themselves because “these guys live in this industry, they know this stuff,” said Tim Crudo, a former prosecutor and white-collar defense lawyer.

“They’re much more conversant in the nuances and the practices” of the financial industries they work in, Crudo said, adding that prosecutors by comparison are “not going to know the business, the industry as well as the defendants know it.”

Breyer pointed in his ruling to a crucial distinction between Bogucki’s case and that of HSBC Holdings Plc’s Mark Johnson, who was convicted of currency rigging by a federal jury in New York in 2017 and sentenced to two years in prison. Johnson is now out on bail while he pursues an appeal.

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In Bogucki’s case, there was a written agreement between Hewlett-Packard and Barclays that established the parties as principals -- and not Barclays as an agent -- at opposite sides of an arms-length transaction. The manager of HP’s foreign-exchange team who negotiated with Bogucki testified that he understood the contract Breyer cited as the “master agreement” governing transactions between the two sides.

Barclays previously settled lawsuits over related claims with both HP and the U.S. Hewlett-Packard has since split into two, HP Inc. and Hewlett Packard Enterprise Co.

Monday’s ruling isn’t the first blow to the Justice Department’s effort to target individual traders after the U.S. won guilty pleas in 2015 from four banks, JPMorgan Chase & Co., Citigroup Inc., Royal Bank of Scotland Group Plc and Barclays, which had to pay a combined $2.5 billion.

In October, three British traders, including one from Barclays, were acquitted by a jury in New York federal court of using an online chatroom to fix prices in the $5.1 trillion-a-day foreign exchange market. That same month, the U.K. Supreme Court blocked an attempt by the U.S. to extradite the former head of currency trading at HSBC and prosecute him in the same scheme for which Johnson was convicted.

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Bogucki’s lawyer, Sean Hecker, hailed Monday’s ruling for showing that “the government’s attempt to rewrite the rules years after the fact runs counter to core constitutional principles of due process.”

“This is yet another failed attempt by the Department of Justice to regulate this market with ill-conceived and entirely unfounded prosecutions,” he said in an email.

Abraham Simmons, a spokesman for the U.S. Attorney’s Office in San Francisco, declined to comment.

The case is U.S. v. Bogucki, 18-cr-00021, U.S. District Court, Northern District of California (San Francisco).


Read this at Bloomberg.