Foreign Exchange Rigging ‘Cartel’ Started With Beers, Jury Told

(Bloomberg) -- An encounter over pints of beer in a London pub led to the formation of a group of traders called “The Cartel,” who illegally manipulated the $5.1 trillion-a-day currency market, according to a former UBS Group AG banker.

Matt Gardiner, the U.S. government's star witness in the New York trial of three other Cartel traders, testified Friday that he was introduced in September 2007 to Richard Usher, the former JPMorgan Chase & Co. foreign-exchange trader, at the pub by a broker they both worked with.

"I really liked him," Gardiner told the jury. "Down to earth, good guy with seemingly no ego."

By the next day, Gardiner and Usher were chatting on a Reuters forum, starting a permanent communication system that would soon move to Bloomberg and include Rohan Ramchandani, former trader at Citigroup Inc. Christopher Ashton, former head of spot FX trading at Barclays Plc, joined the group in 2011. Gardiner went by “Fossil” in the chatroom because he's a few years older than the others.

Prosecutors claim that Usher, Ramchandani and Ashton used the chatroom to manipulate the currency market and make money for their employers. Gardiner, who is cooperating with the U.S. in exchange for a non-prosecution agreement, is the key witness in a government effort to punish individuals involved in rigging key market benchmarks.

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The Cartel members would typically send messages throughout the day. Transcripts that were later made of the chats ran to 100 pages on busy days, Gardiner said. Exchanges included comic banter, discussion of personal matters and market rumors and information.

Prosecutors claim they also coordinated trades to manipulate rates for their benefit.

The transcripts introduced as evidence showed Gardiner, Ramchandani and Usher telling one another of big euro-dollar trades in amounts that could range into the hundreds of millions. An open position would leave them vulnerable as the trader would then have to go into the market to close out a short or long position.

"The open risk is what you try to buy back or sell out of," Gardiner said. "When you have a large position, you're very sensitive to small movements in price."

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Knowing when someone is long or short can provide an opportunity to profit at that trader's expense, Gardiner said. But Cartel members would avoid making trades that could hurt others in the group. And when possible, they would make trades among themselves to help their positions, Gardiner said.

"We had an agreement not to trade intentionally to one another's disadvantage," he told jurors.

In a chat from 2009, Ramchandani told the other two that he had a large short position that he was seeking to clear, according to a transcript. Usher and Gardiner got on the phone to discuss Ramchandani's position, concerned he was pursuing a passive strategy of waiting for buyers to come to him at a time they judged the market was headed up.

"Shall we rip it and bury him?" Usher asked.

"No," Gardiner said.

"That was just a joke," Usher replied.

Gardiner testified he stayed out of the market until Ramchandani informed them he'd cleared most of the position.

Cherry-Picking

Defense attorneys for the three men argued in opening statements that the government is cherry-picking language from their conversations and mischaracterizing it as illegal market manipulation. It was also their job to communicate throughout the day to share market color and do deals, the lawyers said. Their use of the electronic chat rooms was not a secret and a common practice throughout the industry, they said.

They said Gardiner isn't credible. If convicted, the men face as long as 10 years in prison. The trading behavior in the FX market was exposed by Bloomberg in 2013.

Gardiner testified that sometimes Cartel members would let the others know about big client transactions that could move the market, a violation of their banks' policies. They used code names for clients, including "heads or tails" or "coin toss" for China's central bank, "nemesis" for Korea's. They'd use musical references, such as "Musical Youth" or "iPod" for a Dutch pension fund.

Gardiner told jurors about two occasions when Cartel members blew up at each other after losing money on trades, suspicious they were taken advantage of. Both times, the disagreements were soon patched up, he testified.

"I will always try and help you," Usher told Gardiner, after Gardiner apologized for thinking, incorrectly, that he'd been betrayed. "Sorry you got smoked, mate. I've been there before."

The case is U.S. v. Usher, 17-cr-00019, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Bob Van Voris in federal court in Manhattan at rvanvoris@bloomberg.net

To contact the editors responsible for this story: Joe Schneider at jschneider5@bloomberg.net, Elizabeth Wollman

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