By Brendan Pierson
March 1 (Reuters) - Lawyers for the U.S. government and HSBC Holdings Plc on Wednesday urged a federal appeals court to block release of a court-appointed monitor's report on how HSBC is working to improve its money laundering controls.
During an oral argument before a three-judge panel of the U.S. Court of Appeals for the Second Circuit, they argued that a Brooklyn federal judge overstepped his authority when he ordered that the report be made public last year.
A lawyer representing the HSBC mortgage customer who moved to unseal the report countered that it should be released in part because of "huge public interest in understanding what is happening in this case."
The monitor who prepared the report was appointed as part of a 2012 deferred prosecution agreement in which HSBC admitted to violating U.S. sanctions laws and failing to stop Mexican and Colombian cartels from laundering hundreds of millions of dollars in drug proceeds through the bank.
HSBC agreed to pay a $1.92 billion fine and to be monitored by former New York prosecutor Michel Cherkasky, now the executive chairman of the compliance company Exiger, for five years. Under the deal, Cherkasky's reports on the bank's progress have not been public.
Hubert Dean Moore, an HSBC mortgage customer, moved to release one of the reports in late 2015. U.S. District Judge John Gleeson, who was overseeing the deferred prosecution agreement but has since left the bench, granted Moore's motion last year.
Jenny Ellickson, arguing for the government on Wednesday, said Gleeson had improperly interfered with prosecutors' work.
She said releasing the report would make it harder for the government to enforce the deferred prosecution agreement because sources at HSBC would be less likely to cooperate.
"The importance of the monitor's confidential sources is critical here," she said.
Circuit Judge Gerard Lynch, one of the judges on the panel, expressed skepticism of that argument, saying that sources were most likely to suffer retaliation from HSBC, which received the monitor's reports anyway.
Paul Clement, representing HSBC, said it would not be fair to the bank to have the report released, when the original agreement called for reports to be confidential.
David Schulz, who represents Moore pro bono, said it was prosecutors, not Gleeson, who had overreached.
When Lynch pressed him to explain what gave Gleeson the power to order the report's release, Schulz cited his "inherent supervisory powers" over the case.
(Reporting By Brendan Pierson in New York; Editing by Chris Reese)