GUEST BLOG: In for a Pound by Aegis Frumento Esq

March 7, 2019

In for a Pound
"He is not deceived who knows himself to be deceived."

That ancient legal maxim best describes why the court took Robert Bogucki's criminal fraud prosecution away from the jury this past Monday and acquitted him outright.

The Bogucki case is the Justice Department's latest failure to impose ethical norms upon largely unregulated financial markets. This case involved trading dollars for British pounds sterling, but it could as easily have been about a host of other non-securities instruments.

For those who don't know the story, Bogucki traded foreign exchange for one of Barclays Bank's affiliates. The Hewlett-Packard Company was one of Barclays' customers. In August 2011, HP was looking to buy a company in the UK, and needed about 6 billion pounds sterling to pay for it. So, HP accumulated a huge stockpile of pounds. To be truly wonky, HP actually acquired not pounds themselves, but so-called "cable options" to purchase pounds at a fixed dollar price, but that doesn't really matter. What's important is that HP wound up sitting on a huge pile of value denominated in pounds. 

About a month later, HP decided it didn't need all those pounds after all. HP turned to Barclays to help it unload its horde. At that point, HP's trader, Zac Nesper, made a crucial choice. He could have simply sold HP's position directly to Barclays at a negotiated price, which of course would have included mark-up. Instead, he engaged Barclays to facilitate a series of sales of into the market. In doing so, Nesper played, and was played as, a sheep in wolf's clothing.

Bogucki knew something that Nesper didn't, not about the market, but about Nesper. Bogucki knew that Nesper was out of his league, a small fish swimming with sharks, ready to be rolled. He derided Nesper as "a kiddie" trying to "play a little poker." Or, to quote Bogucki later in the story in his own native trader's vernacular, "instead of letting us fuck you for 3 or 4 million dollars, you perfectly supervised the market at large fucking you in the ass for 25 [million dollars], so congratulations."

So it was that in September 2011, Bogucki and Nesper, representing Barclays and HP, signed the standard master agreement of the International Swaps Dealers Association, or ISDA. HP wasn't required to sell its pounds to or through Barclays, but whenever it did the ISDA agreement would govern its terms. The ISDA agreement is by its very nature a contract between equals. It expressly states that all transactions between HP and Barclays would be arm's-length, each one acting as principal, and neither representing the other. 

Nesper understood that Barclays would facilitate HP's trades either by brokering sales of HP's pounds into the market, or by purchasing them itself as principal, whatever would protect its own interest and maximize its own profit. 

Accordingly, there was no fiduciary or trust relationship between Barclays and HP.

So guess what happened next. Bogucki had his team sell pounds short in quantity so as to depress the market price of the pound just before HP sold into it. As a result, HP lost and Barclays gained. 

The government called this fraud because Bogucki lied to Nesper about what he was doing. Bogucki told Nesper that Barclays would look out for HP's best interests, and that the coincidental dips in the value of the pound were not related to anything that Barclays did. In fact, Bogucki told Nesper that Barclays wasn't touching the market at all. But at the same time, Bogucki was instructing his team to "hammer the market lower," and "bash the shit out of this again." He was also hiding from his own superiors, warning his team that, "if it gets back to HP by some loose lipped market monger that we are selling . . . it will go straight to [the head of Barclays' United States Operations] and your ass will be in a fucking frying pan."

All this subterfuge was enough to get Bogucki indicted.
. DOJ's press release crowed that Bogucki "not only betrayed his client's confidences, but also risked undermining public trust in the foreign exchange options market." Ok, but let's not forget that traders aren't the only ones who deal in BS.

Sure, let's take it for granted that Bogucki had advance knowledge of HP's intentions to sell 6 billion pound sterling in market transactions. He knew approximately when HP was going to start selling. He used that knowledge to depress the price of pounds in the market just before HP sold. He lied to HP about what he was doing, and he warned his team not to let Barclays management know. And he made a fortune for Barclays at HP's expense, and no doubt got a sizable bonus for his efforts. Seems pretty bad, doesn't it?

And yet, District Judge Charles R Breyer didn't think it was fraud, and acquitted Bogucki of all charges. This acquittal has sent shockwaves through the financial industry, but it needs to be read in its own context. The first important thing to remember is that this is not a securities law case. The government did not charge Bogucki with any crime of market manipulation, because there is no such crime in the foreign exchange world. If these had been securities, Bogucki's actions could very well be deemed manipulative devices or contrivances in violation of section 10(b) of the Securities Exchange Act of 1934. But since that doesn't apply here, DOJ could only charge Bogucki with simple wire fraud. And in order to make out a case for wire fraud, the government had to prove that Bogucki's lies to Nesper were "material." That's where the government's case fell apart.

It fell apart because Nesper understood perfectly well that Bogucki was not to be trusted. He knew Bogucki was "posturing" and "BS-ing." Likewise, Nesper conceded that he himself was not being straight with Bogucki, providing misinformation about HP's selling intentions. When all was said and done, Judge Breyer concluded, no reasonable jury could find that HP's decisions when or how much to sell were in any way influenced by whatever nonsense Bogucki was telling Nesper, which Nesper didn't fully believe anyway. HP sold according to its own dictates and took whatever price the market was giving. That the market was depressed because Barclays sold short in advance of HP sales was tough luck for HP. No law, practice or contract prevented Barclays from taking advantage of the situation by selling short ahead of HP. Bogucki and Nesper were playing each other. That Bogucki was better at it than Nesper didn't make him a criminal.

Although Judge Breyer's decision may seem counterintuitive, it makes complete sense when stripped to its essentials. But that sense won't necessarily carry over into the world of regulated securities transactions. If Bogucki had been dealing in stock as opposed to British pounds, he might still be facing the wrong end of a securities fraud charge. He wasn't, and that kept his ass out of a hotter frying pan than he contemplated back in 2011.

But wait -- Barclays itself paid over $12 million to avoid prosecution for Bogucki's shenanigans. Doesn't that mean anything? Yes, but not what you think. It means that no major bank or securities firm will ever risk a criminal prosecution. Big law firms make a living charging large players like Barclays a fortune in legal fees to navigate them to a settlement with DOJ, SEC or whatever other alphabet anagram of a threat is out there. Since losing such a case could be an extinction level event, no bank or securities firm ever risks it. Guys like Bogucki, on the other hand, always end up under the enforcement bus for the greater glory of the firm. But it's those guys with the tire tracks on their backs, like Bogucki here, who have both the interesting legal cases and the need to fight them. And that is why I like representing them.


Aegis J. Frumento
Stern Tannenbaum & Bell
Co-Head, Financial Markets Practice

380 Lexington Avenue
New York, NY 10168

Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters.  Mr. Frumento also represents clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents. Those now include industry professionals looking to adapt blockchain technologies to finance and financial market enterprises.

Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.

He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of Blog.

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