Barclays Trader Goes to Trial Over Criminal Front-Running Claims

(Bloomberg) -- The criminal trial of a Barclays Plc foreign exchange trader over a complicated $8 billion transaction may hinge upon the context and perceived meaning of conversations, instant chats and emails -- ranging from the ordinary to the profane -- among his cohort.

The case stems from Hewlett-Packard’s hiring of Barclays as an adviser for its ultimately disastrous 2011 acquisition of Autonomy Corp., which at the time was the U.K.’s second-largest software business.

That year, Robert Bogucki was the head of Barclays foreign-exchange trading in New York, making about $3 million annually. After Barclays sold HP 6 billion pounds ($7.9 billion) in cable options to help finance the deal, the bank was later asked to unwind -- or sell -- that position. Prosecutors, who have charged him with wire fraud, claim Bogucki was part of a “front-running” scheme to depress the value of HP’s cable options, profiting the bank at HP’s expense.

In a jury trial starting Wednesday in San Francisco, the question of whether Bogucki, 46, misused client information to manipulate the options market may be answered by the daily communications of traders, many of which could cut both ways. Do one trader’s promises in a chat with Bogucki to “spank the market” and “bash the sh-t out of the market” indicate a conspiracy, or money-making fervor?

The same ambiguity applies to various Bogucki communications that show him urging discretion about HP’s position while also contemplating what to do about it.

While Bogucki promised HP the transaction would “be kept very quiet” and claimed he was “not touching the market,” prosecutors say he instead declared during one telephone call, “we need to figure out what to do with this information.” They say he then directed options trading to try to lower the price of volatility -- a metric that affects the value of currency options.

A spokesperson for Barclays declined to comment, as did Sean Hecker, a lawyer for Bogucki.

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.

Hecker has said Bogucki followed the rules that governed market makers in foreign exchange for many years. He told U.S. District Judge Charles R. Breyer at a pre-trial hearing that the foreign exchange options market is different from a securities market governed by a regulator like the Securities and Exchange Commission.

At the time of the 2011 cable options trades, regulations permitted Barclays’ “pre-positioning,” or trading in advance of HP’s unwind, even if the trades were adverse to HP, Hecker said at the hearing.

There’s no witness “who’s going to say that trading ahead, based on knowledge that HP might trade, is improper,” Hecker told the judge. “The government is trying to create a crime, create duties that do not exist in this market.”

A common defense against financial fraud charges is the argument that both parties knew exactly what they were getting into, said Tim Crudo, a former federal prosecutor now practicing as a criminal defense lawyer. Bogucki’s lawyers have repeatedly made the point in court and briefs.

The argument is “these are sophisticated parties who understand the nature of the transactions, the nature of the business, and what may appear to be improper conduct in this particular context isn’t necessarily so,” Crudo said. “Sometimes that’s a valid defense.”

To win a conviction, prosecutors must prove Bogucki made important misrepresentations to HP as part of a scheme to defraud the company. His alleged betrayal of HP’s confidentiality may help to satisfy another requirement -- proving intent.

Prosecutors may argue that despite the parties’ sophistication or what’s written in any contract, “it’s another thing to take the very information from HP and use that in a way that harms HP and benefits Barclays,” Crudo said. “Barclays is saying one thing to HP and doing another and that’s fraud, is the argument.”

To that end, prosecutors have at least one taped conversation that may support the point. Previewing the government’s case at a hearing last week, Assistant U.S. Attorney Brian Young told the judge that prosecutors have a transcript of Bogucki promising a Hewlett Packard executive that Barclays won’t reveal the transaction.

“I will keep this quiet. And if we don’t -- if any of my guys don’t keep it quiet -- it would be a fireable offense,” Bogucki told Hewlett Packard on Sept. 27, 2011, according to Young.

Crudo, the former federal prosecutor, said the conversation could prove difficult for Bogucki.

“When you’ve got the defendant acknowledging in a recorded conversation, ‘We will keep this quiet, and if we don’t someone’s going to get into trouble,’ it makes it a much tougher argument for him to say, ‘I didn’t know I was doing something wrong,’” Crudo said.

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

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