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The Misguided Prosecution Of Barclays’ FX Trader Robert Bogucki
October 30, 2019
Hewlett Packard purchased United Kingdom based software company Autonomy in 2011 for $11.1 billion, a 64% premium for a company with nearly $1 billion in 2010 revenues. HP later claimed that Autonomy inflated its financial results at the direction of its most senior executives through backdated purchase orders. The acquisition was part of a master plan by HP’s then-CEO, Leo Apotheker, to shift the computer giant from an equipment manufacturer to software company. Apotheker was fired after only 12 months on the job.
Autonomy’s former chief financial officer, Sushovan Hussain, was found guilty of fraud by a federal jury earlier this year in San Francisco for orchestrating an elaborate accounting scheme that overstated revenues. Hussain was sentenced to 5 years in prison by U.S. District Judge Charles Breyer but is currently appealing his sentence and is free on bail pending the appeal result. Autonomy CEO Mike Lynch is currently facing fraud charges in the U.S. in a case that should last until the end of the year.
HP wrote down $8.8 billion on the Autonomy acquisition and is currently in litigation in a UK court and the Financial Reporting Council is in the midst of suing Autonomy’s then-accounting firm, Deloitte. It is a mess, but not as much of a mess as the misguided criminal case against Robert Bogucki, head of currency trading for Barclays in the U.S.
Bogucki’s team made markets in currencies and currency options and had absolutely nothing to do with any due diligence associated with the of Autonomy acquisition. HP had 6 billion British pounds of a currency options that they no longer needed to hedge related to the autonomy acquisition. So, after consulting with some select banks, they worked with Barclays, Deutsche Bank and Bank Paribas. They sold Barclays 2 billion British Pounds of their options on the first tranche and 4 billion in a second tranche. The prosecution claimed that Barclays hedged its risk on the first tranche in a way that harmed HP (cost them money) on the second tranche. The short version is that prosecutors believed that Barclays, via Bogucki, was front running the deal.
The prosecution brought in heavy weight attorneys Brian Reese Young, U.S. Department of Justice Criminal Division and Justin Weitz U.S. Department of Justice Fraud Section. It would be a big case for the government to convict a big time banker, any banker.
Bogucki’s responsibility on the Autonomy transaction was to show HP pricing to enter and exit the currency hedging contracts. Barclays currency division’s performance on both ends of the transaction earned Barclays the prestigious Euromoney “Currency Derivatives House of the Year” Award six years later. US prosecutors reached out to HP to tell them that they believed they were harmed by Barclays, and particularly Bogucki, on the currency hedge. The government played Barclays trading floor phone recordings, standard operating procedure for banks. Once Barclays knew they too could be on the hook for possible fines, they threw Bogucki under the proverbial bus.
The head of Barclays legal and litigation in the Americas came to Bogucki’s office in New York and said that Barclays was conducting an internal investigation on the HP trade as part of a regulatory requirement. As that investigation continued, Bogucki received a call for a meeting on November 3, 2016 when they told him that he was being placed on an “administrative leave of absence.” He was shocked. A year later he was criminally indicted.
The case was prosecuted out of the Northern District of California and ended up in the courtroom of Judge Breyer, the same federal judge who oversaw Autonomy’s CFO, Hussain’s trial.
The way to nail Bogucki was to convince a jury that he had some sort of a fiduciary duty to HP to minimize the costs of trading currency insurance ... insurance on a deal that was fraudulently inflated by billions to begin with! Bogucki’s defense was simple: in an arms length principal-to-principal transaction, neither party has a fiduciary duty to anyone other than themselves ... the banks and HP were looking out for their own interests.
Prosecutors tried to convince the jury that Bogucki had not disclosed information about the Barclays trading that the treasurer of HP would’ve “wanted to know.” During cross examination, Bogucki’s attorneys showed that there was plenty of information that Bogucki would have also wanted to know from the treasure of HP.
The government’s star witness was Zachery “Zac” Nesper who, in 2011 was the director of foreign exchange trading at HP. He had six finance whizzes who worked for him to manage foreign currency transactions in the 170+ countries in which HP operated. Like other multi-national companies, HP needed foreign currency for all kinds of international activities to pay rent, expenses, salaries, and manage operations. Nesper also took it upon himself to manage the multi-billion dollar Autonomy transaction and worked primarily with Barclays (Bogucki).
Nesper acknowledged in cross examination that he was being “cagey” and “elusive,” with Bogucki at the time of the transaction. He also admitted to “bluffing” and “BS-ing,” Bogucki throughout the transaction. Sean Hecker, Bogucki’s attorney showed him three examples of where he misrepresented pricing information that he obtained from other banks, banks that he repeatedly and specifically claimed he was also not speaking to during the transaction. His purpose? To pass for a better price and falsely assure Bogucki that he would not have any liquidity in exiting the risk that HP was imparting on Barclays.
The trial was scheduled for four weeks but after six days Bogucki’s defense attorney Sean Hecker asked Judge Breyer for a Rule 29 motion, an acquittal based on insufficient evidence to sustain a conviction. It’s a usually a “big ask” unless prosecutors have totally failed in their mission. They had.
After prosecutors presented their case, Judge Breyer seemed to lead the discussion that “I'm not adverse to hearing the Rule 29 motion now. I mean, that's sort of the traditional time to hear it, at the conclusion of the Government's case. So I was also prepared to hear it tomorrow afternoon. But it's up to you. You want to proceed now, you can proceed now.”
Hecker was eager to pounce and Breyer was ready to listen. Breyer criticized Nesper about his “totally unreasonable subjective beliefs that Barclays was looking out for him while he admits to having misrepresented the most fundamental aspect of that transaction, the price he was being offered for those same options by other banks.” Breyer continued saying that, “the notion that there was any duty running from Barclays to HP is preposterous. It has been preposterous, and yet they opened on it.”
Hecker made his closing pitch, “Look, this is a massive due process problem. The entire bank knew they were pre-positioning. The entire bank. His boss, every trader, their witnesses.”
Breyer agreed and spoke directly to AUSA Young. “It's a massive due process problem ... I think you should address the fact that this is a criminal prosecution. And that means the rules have to be very clear. Notice has to be very clear. Lines have to be very clear, because when somebody crosses a line and is likely to end up in jail, you want that line to be clear.”
Following is an actual exchange from the court transcript:
Judge Breyer: There is no set of specialized rules dealing with foreign currency transactions; is that correct?
Young: There's no regulation.
Judge Breyer: There's no regulation and no set of rules.
Young: The set of rules that applies is the front-running policy from Barclays.
Judge Breyer: Oh, fine. Okay. Then let's look at it.
Judge Breyer: Okay. And I look at — number one, I don't think that's true because I don't know that somebody goes to jail by virtue of the fact that he didn't follow company policy. I actually don't think so.
Young: ... the fact that somebody should have discovered something and didn't, the fact that a victim may be gullible or not — we can look to the Lindsey case — is not dispositive of materiality. And I think in defense of Nesper ... Judge Breyer interrupted.
Judge Breyer: No, no, no. Excuse me. I watched the witness [Nesper]. The last thing I would say was the Hewlett-Packard head of foreign exchange currency is a particularly gullible person. He may have bad business judgment — I don't know — or great business judgment, but I wouldn't call him gullible. Do you think I watched him and he looked gullible?
Young: Well, I thought that that's what —
Judge Breyer: He was lying to these people [Barclays]. He was puffing. He was being crafty. He was — these are his words, not mine. He was being duplicitous. He was trying to work them into a better deal. Gullible? No. If anything, it was the opposite of being gullible. He was manipulative. Now, that's what he was. I don't — and, by the way, I'm not faulting him. I'm not saying this is inappropriate conduct. I'm just saying it doesn't seem like he's gullible. I'm just taking your word and commenting.
Hecker ripped into the government’s case, “He says, ‘I'm going to show you the best price. I'm going to show you where I can do the trade. I think it's going to be the best price’ — we know from all the evidence that it was — ‘ ‘and I can also pretty much guarantee you that even if you didn't want to do it, not one person on my staff, not one of my traders is going anywhere near that market because I'll tell them not to.’ And guess what? He came back and traded with us at the best price. That can't be the basis for a fraud claim, a criminal fraud claim, while the guy's lying to us about the price he's getting from other banks? It is so outrageous to me that we're here. You would have thought there was more.”
Hecker continued, “We kept waiting. There must be some smoking gun. They must have some evidence that we're not aware of that they didn't produce or they're going to produce in the middle of trial that Rob Bogucki told some other bank or he traded personally. There's nothing more to this case. It is a complete fraud. The case is a fraud. It has been misleading the Court. It's been misleading the jury. There is no core to it. There never has been.”
Judge Breyer spoke to Young, “You're not in the business. I'm not in the business either, but I can appreciate the business. And it seems to me — and I think that, by the way, that's the problem your [government] expert [Dartmouth Clinical Professor of Business Administration, William Canavan Martin] has, among other things — is it's not the way the business works ... And you can't you take a business and then, after the fact, you impose a set of rules on them or views as to what they do and then prosecute them for having done it before they even know what the rules were. I mean, that is the essence of an improper prosecution as far as the Court is concerned.”
The following Monday, Judge Breyer brought the case to an end by granting the Rule 29 motion determining that no reasonable juror could convict Bogucki.
Bogucki could have spent decades in prison if a jury had gotten this case wrong .... and prosecutors Brian Young and Justin Weitz should be called out for pushing a case that was a waste of money, could have put other investment professionals at risk and, most egregious, sent an innocent man to prison.
Read this article on Forbes.
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