Navinder Singh Sarao: Criminal Mastermind or Sacrificial Lamb?

28 04 2015

This article examines the charges against Navinder Singh Sarao and it argues that he is put in an invidious position in comparison to traders protected by predatory global banks. The Parliamentary Commission on Banking Standards (PCBS) had dubbed bankers “the masters of the universe” because of their repetitious recklessness and disregard for customers and shareholders. Yet, the banks are routinely able to pay their way out of trouble. From that perspective, Sarao becomes a sacrificial lamb and a scapegoat in America’s quest for bringing abusers of the market to justice. Indeed, Nick Leeson – the historic “rogue trader” from two decades ago, who wrecked Barings Bank by losing £832 million and subsequently went to ground – was of the view that Sarao is a likely scapegoat and he may not have foreseen the consequences of his actions. But can we trust the words of Leeson, who in his professional career, seems to have been nothing short of a congenital liar? On the other hand, the information available in the public domain points to the existence of a double standard that puts Sarao in a relatively prejudiced position in comparison with other bent individuals who remain above the law and are treated leniently.

Applying the hierarchy devised by Roger McCormick in Seven Deadly Sins: ‘Retrospectivity, Culpability and Responsibility’ – save that Sarao was not a bank operative – it is apparent that Case 1: “Clustered Criminality” has controversially been put behind Case 5: “Individual Criminality”. Clustered Criminality, of which benchmark manipulation is a classic case, occurs “where there is at least strong suspicion that a crime has been committed and although the culprits may not be immediately clear it seems likely that more than one person was involved.” Individual Criminality, which the “rogue trader” classically exemplifies, is “where there is clear evidence that a crime has been committed by a bank employee and the culprit (usually acting alone) is identified.” Thus, recent events may be read as turning the hierarchy on its head by putting Case 5: “Individual Criminality” at the apex of culpability. The approach is questionable because the egregiousness of Case 1 is amply reflected in the fact that it led to the formation of the PCBS. Analysed against the fact that benchmark rigging traders in Deutsche Bank escaped prosecution because of the bank’s ability to pay a record breaking fine of £1.7 billion, Sarao’s case makes a striking comparison because he does not have the option of paying his way out of trouble and finds himself charged in criminal proceedings that have a punishment totalling 380 years’ imprisonment. (For the avoidance of doubt, the hierarchy consists of Case 1: Clustered Criminality, Case 2: Corporate Regulatory Breach, Case 3: Imputed Breach, Case 4: Corporate Regulatory Failure, Case 5: Individual Criminality, Case 6: Corporate Reputational Event and Case 7: Individual Reputational Event. )

Viewed in juxtaposition, the differential treatment raises questions about whether the criminal law still plays any part in proceedings against international banks or whether it is effectively a dead letter? On proper analysis, if anything, recent events (21 April 2015 – 27 April 2015) demonstrate an inversion of the meticulous hierarchy developed in Seven Deadly Sins. They also debunk the “maxim” that “it’s not our fault, we didn’t know” because employees in Deutsche Bank were quite well aware of the nature and quality of their deliberate benchmark manipulation. (Deutsche Bank has been the focus of recent regulatory action and from 2009 to 2014 it has been fined £7.32 billion for misconduct or what the National Health Service (NHS) needs to survive by 2020: see details below in 7. Trouble No More: Paying Your Way Out )

Readers should note that Professor McCormick does not necessarily endorse my reading of his theory, but I have nonetheless taken the liberty to use it as a didactic device to advance my own freewheeling analysis in which I propose a dynamic interpretation of Professor McCormick’s work because of the important public issues at stake. This paper contextualises Sarao’s circumstances, analyses the culture of trading, critically evaluates the latest round of fines and concludes that the hierarchy of culpability in relation to corporate misconduct has arguably been inverted in practice.

1. Context

The criminally charged futures trader, Navinder Singh Sarao, was recently arrested in Hounslow (London) on 21 April 2015. It is alleged that the thirty six year old trader illegally manipulated the stock market and caused the US$500 billion (arguably even US$1trillion) market “flash crash” of May 2010 when the Dow Jones Industrial Average plummeted 600 points in five minutes. During the rout, the market, which rebounded in a matter of minutes, lost almost a tenth of its value. As a result of the momentary wipeout, which had only heightened existing anxieties about the financial crisis, the US is seeking to extradite Sarao in order for him to face American justice. The new theory underpinning the cause of the flash crash is a radical departure from the regulators previous position that the crash did not involve manipulation and occurred because of a big sale of contracts from a large trader.

His bail conditions include a £5 million security, fitting him with an electronic tag and a prohibition from using the Internet. With £5 million in a trading account and other smaller amounts elsewhere, at first blush Sarao and his family appeared to possess the finances to pay for bail. Yet, at the time of writing, he remains in custody because of failure to provide the requisite £5.05 million in bail. (Sarao’s first bail hearing was on 22 April 2015. He appeared in court on 29 April 2015 and has been given another week to come up with the funds (£5.05m) to secure his release. He is scheduled to reappear in the Westminster Magistrates’ Court again on 6 May 2015.)In fact, appearing in Westminster Magistrates’ Court on 6 May 2015 he is reported to have said:

I’ve not done anything wrong apart from being good at my job. How is this allowed to go on, man?

Sarao’s problem is that was unable to access £5 million pounds because U.S. authorities froze his assets. He remains in custody. A request for the bail surety to be decreased to £50,000 was rejected by District Judge Elizabeth Roscoe who rules on 6 May 2015, “I will not vary bail. I will leave it as it is.”

It is said that Sarao, who has been charged in separate criminal and civil complaints in the US, used to be a happy go lucky lad in Brunel University and was quite a “merry prankster” (albeit not exactly in the historic sense of term as understood in the rebellious 1960s). Born and raised in London, he worked in banking before setting up his own business from his parents’ house in Hounslow in 2005. He is said to have trained in London at a trading arcade operated by Futex. According to Futex, he was not involved in any impropriety during his time there (2003-2008) and was a hard worker and diligent trader. Sarao’s problems are rooted in a whistleblower’s 2012 report to US commodities regulators that triggered investigations about him and culminated in civil and criminal charges.

The affidavit of special agent Gregory LaBerta – the special agent of the Federal Bureau of Investigations (FBI) working alongside the Commodities Futures Trading Commission (CFTC) – in support of the criminal complaint against Sarao is quite telling about exact charges levelled against him. The rogue trader has been charged with four criminal offences on 22 counts which include one count of wire fraud, 10 counts of commodities fraud, 10 counts of commodities manipulation and one further count of “spoofing”. Spoofing is a practice of bidding or offering with the intent to cancel the bid or offer before execution, a bait-and-switch tactic whereby orders placed have no intention of being executed. It is synonymous with fake orders and may potentially hamper the profits reaped by high-frequency traders.

2. America’s Most Wanted

2.1. Criminal Charges

Sarao’s actions allegedly violated section 1343 (Fraud by wire, radio, or television) and section 1348 (Securities and commodities fraud) of Title 18 (Crime and Criminal Procedure), Part 1 (Crimes), Chapter 63 (Mail fraud and other fraud offenses) of the United States Code. Equally, his behaviour is said to have contravened section 6c(A)(5)(C), relating to prohibited transactions, of Title 7 (Agriculture), Chapter 1 (Commodity exchanges) of the United States Code and section 13(a)(2), relating to jurisdiction of states, is also engaged in Sarao’s case.

The complaint contends that Sarao’s manipulation, by way of an automated trading programme, produced “significant profits” for him. The Standard & Poor’s 500 Index is an index of 500 stocks. It is designed to be a leading indicator of US equities. The E-mini S&P 500 is a stock market index futures contract based on the Standard & Poor’s 500 Index and is one of the most popular and liquid equity index futures contracts in the world.  The contract is traded only at the Chicago Mercantile Exchange (CME). Sarao is said to have manipulated the market for E-mini S&P 500 futures contracts (E-mini S&P) on the CME.

The drop in the price of these contracts is thought to have contributed to the Flash Crash. Allegedly a “dynamic layering” scheme was used to affect the price of E-mini S&P contracts.  This involved putting into place multiple, simultaneous, large-volume sell orders at different price points – technically called “layering” – to created the false impression of substantial supply in the market. It is alleged that Sarao placed one-fifth of the sell orders on the day of the crash.

Allegedly, the sell orders were then modified on a regular basis so that they remained close to the market price but were later cancelled without being executed. The modifications ensured that the sell orders remained at least three or four price levels from the best asking price; they remained visible to other traders, but staying safely away from the best asking price. This activity drove prices down and allegedly allowed Sarao to sell futures contracts only to buy them back at a lower price. On the other hand, when the market moved upwards after the activity had ceased, Sarao allegedly bought contracts only to sell them at a higher price.

The International Assistance Unit of London’s Metropolitan Police Service is assisting the American authorities prosecuting Sarao’s case which is the first to be brought in relation to the destruction of the US equity market. The FBI’s Chicago Division has been investigating the case and it is being prosecuted by Assistant Chief Brent S Wible and Trial Attorney Michael T O’Neill of the Department of Justice’s Criminal Division’s Fraud Section.

All this a lot of bad news for Sarao because, if convicted, the twenty two criminal counts against him attract a maximum sentence that runs into hundreds of years (almost four centuries of imprisonment!).

The self-confessed insomniac is said to have profiteered illegally to the tune of £26.7 (US$40 million), money he siphoned off to companies he had incorporated in the Caribbean. As noted above, his actions are said to have nearly instantaneously destroyed £500 billion in value in the Dow Jones Industrial Average. However, in response to concerns regarding his conduct, Sarao is reported to have told the CME to kiss his behind. And he is also said to have paid his tax consultant £375,000 to transfer money to Federation of St Christopher & Nevis – a move that apparently saved him £7 million in tax.

2.2. CFTC Complaint

The CFTC is unable to monitor cancelled trades in real time because it does not have the technological capacity for this. Its investigations rely on exchanges for post-event order information about particular transactions on particular days.

The CFTC complaint intersects with misconduct alleged in the criminal charges and emphasises that, even in the month of April 2015, Sarao and his company waged a ferocious campaign to manipulate the price of the E-mini S&P by relying on a variety of exceptionally large, aggressive, and persistent spoofing tactics. According to the CFTC, between April 2010 and April 2015, Sarao used his layering algorithm on over 400 trading days. By causing large imbalances, in the E-mini S&P visible order book to affect the prevailing E-mini S&P price, through the use of his algorithm he was able to trade in a style that was designed to profit from the temporary artificial volatility. Among other things, the compliant alleges:

  • from April 2010 onwards, Sarao profited over US$40 million, in total, from E-mini S&P trading;
  • he was exceptionally active in the E-mini S&P on May 6, 2010, the day of the flash crash – that afternoon the E-mini S&P market price suffered a sharp decline, followed shortly thereafter by sharp declines in the prices of other major US equities indices and individual equities;
  • Sarao used the layering algorithm continuously, for over two hours, immediately prior to the precipitous drop in the E-mini S&P price, applying close to US$200 million worth of persistent downward pressure on the E-mini S&P price;
  • his manipulative activities contributed to an extreme E-mini S&P order book imbalance that contributed to market conditions that led to the flash crash; and
  • Sarao engaged in a variety of other manual spoofing techniques whereby he would place and quickly cancel large orders with no intention of the orders resulting in transactions; this manual spoofing was used to exacerbate the price impact of the layering algorithm.

Therefore, the CFTC is seeking permanent injunctive relief, disgorgement, civil monetary penalties, trading suspensions or bans, and payment of costs and fees. According to the CFTC, owing to Sarao’s ongoing unlawful conduct and the potential for dissipating his profits, on April 17, 2015, US District Judge Andrea R Wood issued an order freezing and preserving Sarao’s assets and prohibiting him from destroying documents or denying CFTC staff access to his books and records. The CFTC’s motion for a preliminary injunction shall be heard on May 1, 2015.

3. Presumed Guilty?

The Americans are clear that Sarao is presumed innocent unless and until proven guilty. However, it remains to be seen whether the American system of justice will uphold his rights. Will an American jury see what an English one would see? With so much negative press against him, the former are quite likely to perceive him as some British weirdo who must be punished.

In the long run it will be interesting to learn whether Sarao is an intended scapegoat or whether he really is the lynchpin of world’s financial woes. In the event that he really is a criminal mastermind, his case exposes a major flaw in the system because if a lone rogue trader was singlehandedly able to cause the market to crash by virtue of an algorithm then we can only ask the question why it took four years to take action against him.

The delay in action has caused alarm and Rick Fier, Director of Equity Trading at Conifer Securities LLC (New York) reportedly said:

It’s ridiculous, it’s the government at its best – inept.

On the day of the bail hearing (22 April 2015), District Judge Quentin Purdy said in the Westminster Magistrates’ Court that the sums of money in the case were large. It is part of America’s case against the Briton of Sikh immigrant parentage (whose frugal lifestyle of living with his parents and not owning a car directly contradicted his wealth and arguably accorded more with Gandhiji than with a destroyer of world markets) that he is unable to account for millions of pounds that he had made. For example it is reported that one of his companies, Nav Sarao Futures, had £7.5 million cash on its balance sheet in October 2013.

But the swoop on Sarao, which leaves him in an invidious position in relation to other traders in the big banks, has not been without its critics and these voices are discussed below: see 8.2. Public Opinion: Internet Voices.

4. Ultra-Fast Light Speed Trading

High-speed trading involves traders relying on computer algorithms to buy and sell stocks in a matter of milliseconds. As noted above, the layering technique created the illusion of substantial supply and this allegedly enabled Sarao to buy and sell futures contracts tied to the value of the share indexes: see 5. Sacrificial Lamb below for more details.

As stated above, the tactic of pushing down prices by using software to spoof markets is at the heart of the case against Sarao who claims to have “changed his mind” and thus cancelled. However, he instructed his software developers to design functions allowing him to cancel his orders in the event the market moved close to where his orders rested. The bespoke software was designed to fit his designs. As reported, the programme enabled him to:

… automatically cancel orders as the price of the S&P stock market futures index, which is based on the Standard & Poor’s 500 index, shifted closer to the price where he had placed his orders. The practice would lead authorities to conclude that Sarao never had any intention to fill these orders – and instead was intent on just trying to manipulate the contract in question.

An analysis, commissioned by the CFTC, of his trading activity on twelve particular days revealed that using his programme he cancelled twice as many times (99 percent) as other traders (48 percent). But Sarao, who was a real busybody with corporate dealings ranging from US$17 million in assets in an account at Hinduja Bank (Switzerland) to companies in the Caribbean (and ambitions of expanding into the United Arab Emirates), has already been vindicated to an extent in some other media reports.

He is also said to have informed the Financial Conduct Authority (FCA) in an email in 2014 that he did all his trading manually and that he had a unique ability to take lightening fast actions. According to him, his intuition and decade long experience in the field provided him with the reflexes to change his mind extremely rapidly. He similarly told the UK financial watchdog that he did not want to be picked off by the big boys and therefore his trading software was custom built by Edge Financial to cloak his orders so that the front running high-frequency trading crew would be unable to identify him.

Notably, investigations in the aftermath of the flash crash revealed that almost 60 percent trading activity in the US as regards the stock, currency and bond markets turned on computers dealing with each other at high frequency.

5. Sacrificial Lamb

The other side to Sarao’s story is that, rather than being a venal character, he is deliberately being singled out from the (equally rotten) crowd so that a lasting example can be made out of him. It is said that the overall culture of trading is such that Sarao is not the exception. Rather, his conduct is representative of the global culture of trading where toxic level of speed drives trades and no matter how fast you are going you want yet more acceleration. In comparison to the past, market volatility is therefore inherent in the nature of high-frequency trading, and as lucidly explained by Matthew Lynn in Trading at the Speed of Light:

As exchanges became entirely electronic during the Nineties, it became possible for highly specialised trading firms, and enterprising individuals, to trade shares ever more quickly. What started out taking seconds quickly became micro-seconds, then milli-seconds, and then nano-seconds (a nano-second, in case you are wondering, is one billionth of a second). A vast amount of money has been sunk into building ever more complex trading systems, using high-speed links to connect them to the exchange hub, allowing them to trade financial instruments at bewildering speeds.

In this world, factors such as building the hub really close to the exchange make a big difference, because a few hundred yards can shave a fraction of a nano-second from a trade. One firm caused a ripple of excitement recently when it started exploring trading in pico-seconds – that is, one millionth of a millionth of a second. That runs up against one rather obvious barrier: the speed of light. It shouldn’t actually be possible to trade in less time that it takes a light particle to travel along a length of cable – but the high-frequency boys are working on it anyway, and may even succeed.

Matthew Lynn’s conclusion is that irrespective of the case against Sarao, the “real crime” is to let the market place be converted into a “casino” and allow stability to get destroyed in the name of liquidity which the high-frequency crowd justifies under the guise of “ensuring there are plenty of buyers and sellers.”

Moreover, as reported in the Guardian:

Eric Hunsader, chief executive of financial data company Nanex which monitors all market trades, said it was very unlikely that a single trader could have caused the crash – and questioned why it had taken so long for the authorities to discover Sarao’s suspect trades.

Pointing out the other side of the coin, Eric Hunsader explained:

I think he’s a small fish, it’s really disappointing to see the Justice Department laying the blame on a small guy, [it is as if] they are afraid of the big players … I don’t think they thought this through. If one guy can do this what [could] a well capitalised country or terrorists do? The only thing preventing him from causing total destruction was fear of getting caught. A terrorist wouldn’t have that fear.

Even more tellingly, in light of the fact that the so-called “flash crash” began at 2:42:44 pm on 6 May 2010, the day he is said to have profited almost US$900,000, outstanding question marks hover over Sarao’s culpability in the alleged fraud because his trading algorithm was switched already off two and half minutes before things went downhill. For the avoidance of doubt, it is said that in the faster than light world of trading a couple of minutes are like an aeon. According to Eric Hunsader:

The CFTC had audit trail data [at the time of the report], there’s no way they didn’t know about this … you cannot miss it; it really is that easy.

So, against that, Sarao is arguably a fall guy and a scapegoat. It is convenient to catch him out and sacrifice him on the altar of legal altruism because despite sharing their need for speed he lacked the prowess, resources and clout of the bad boy city crowd.

In addition to Hunsader’s analysis, in Can Navinder Singh Sarao Really be a Wolf of Wall Street? Ben Wright also raised a series of crucial questions – such as was Sarao a high-frequency trader? Was he even trading during the flash crash? Why did it take the regulators so long to find him?

Wright concluded that it is likely that his role in the crash is being exaggerated for political expediency. Equally, he expressed serious concerns about the vulnerability of the market to a maverick trader (who was far removed from the real corridors of power in the gleaming sky scraping towers where the elite of the financial world hang out).

6. Invidious Position

But how do the above facts fit into the bigger picture of abusing the market and deliberately violating its integrity? Nav Sarao Futures or Nav Sarao Milking Markets (the trader’s Caribbean company) were small companies. Vice-versa, it is striking that others (such as Deutsche Bank) who are involved in corporate crime can easily pay their way out of their misconduct. It is a case of history repeating itself and against that backdrop Sarao is placed in an invidious position because he is unable to buy his freedom out of the criminal charges against him.

The case against him argues that he initiated his “dynamic layering” at about 9:20 am which he later intensified from 11:17 am until 1:40 pm and it is alleged that at 12:33 pm, the spoofing was initiated and large sell orders were placed to drive prices down. Consequently, the fall in prices of the contracts enabled Sarao to artificially cherry pick lucrative deals and resell the cheaply acquired contracts at a profit.

However, upon anxious scrutiny, the theory is easily negated by Hunsader and Wright’s observations (above) that he stopped trading two and a half minutes prior to the onset of the crash. Even if it is assumed that this approach is incorrect, it is most telling that the CME has adopted and reiterated its 2010 position that “the Flash Crash was not caused by the futures market.” The CME also maintains that the law precludes it from divulging information about any individual’s trading behavior.

7. Trouble No More: Paying Your Way Out

7.1. Overview

In comparison to Sarao’s tough predicament, it is striking that criminal charges against derivates traders in Deutsche Bank have not been given the same degree of importance and the bank has been able to pay £1.7 billion/US$2.5 billion to buy its way out of trouble. It seems expedient for the authorities to use two different standards of justice for two different types of criminal operating in the same environment, type one being the maverick self-styled trader of immigrant extraction and type two being the big bank bad boy in the employment of a global predatory bank. The penalties imposed by the US Department of Justice, CFTC, the New York Department of Financial Services and the FCA make Deutsche Bank the new world record holder for misconduct. Prior to this event the accolade belonged to UBS which paid similar fines totalling US$1.5 billion in 2012. Drop by drop, such fines are adding to the ocean of international penalties which added up to a grand total of £173.22 billion between the period 2009 to 2013 (see the table below: Deutsche Bank’s share of these was £5.62 billion and we can add the £1.7 billion to that figure [£7.32 billion, or what the NHS needs to survive by 2020]).

Moreover, it is important to note that Standard and Poor’s believes that the fines are “a way of life”. The following germane information can be extracted from their study released yesterday entitled Carry That Weight: The Top Four U.K. Banks Are Still Burdened By Conduct And Litigation Charges which is based on three heads of misconduct arising out of Payment protection insurance (PPI), Interest rate hedging products (IRHP) and other customer redress and litigation charges:

  • getImage-2UK banks and building societies have incurred £48 billion in conduct and litigation charges over the five years to 2014;
  • the four largest UK banking groups, i.e. Barclays, HSBC, Lloyds and RBS account for £42 billion of this total;
  • a further £19 billion of conduct and litigation charges for these four banks are in the offing over the next two years (£14 billion in 2015, the worst year in history for UK bank fines);
  • although these charges continue to weigh on bank-specific assessments it is doubted that these ongoing charges will lead on their own to negative rating actions, primarily it is believed that the affected banks have sufficient capital buffers.

The benchmark rigging is all the more problematical in light of the fact the value of LIBOR linked contracts arguably ranges from US$300 trillion up to US$800 trillion: see The Wheatley Review of LIBOR: Initial Discussion Paper, p. 10 at para 2.7; similarly the FCA’s final notice to Deutsche Bank discussed below states that “LIBOR is the most frequently used benchmark for interest rates globally, referenced in transactions with a notional standing value of at least US$500 trillion.”

Just to recap briefly, LIBOR is a globally used benchmark interest rate in financial markets. As the primary benchmark for short-term interest rates, LIBOR is written into standard derivative and loan documentation. Its use underpins a range of retail products, including mortgages and student loans, and LIBOR equally forms the basis for settlement of interest rate contracts on many of the world’s major futures and options exchanges. Moreover, LIBOR is a yardstick to measure the health of the banking system and it is an evaluator of market expectation for future central bank interest rates – indeed it has been dubbed the “world’s most important number”. Furthermore, IBOR (i.e. LIBOR and EURIBOR) rates represent the cost at which the bank reckons it can borrow funds. A high submission by a bank indicates that the bank would pay a high amount to borrow funds which, in turn, exposes a liquidity problem and demonstrates that the bank is experiencing financial difficulty.

From what is known, Sarao’s activity was nowhere near as dangerous as benchmark fixing perpetrated by the rapacious banks and traders who deliberately flouted the law. The fact that these two situations coincide paradoxically demonstrates the selective nature of justice for persons accused of corporate crime. The timing of these events, Sarao’s arrest and the record-breaking fines imposed on Deutsche Bank, further unmasks the legal paradox that is unfolding in the financial services and banking sector.

In light of the information available in the public domain, the restive co-existence of the double standard inclines the reasonable bystander towards the view that Sarao is put in a relatively prejudiced position. In the grand scheme of things, others who acted in a more ruthless manner appear to be well protected by their rich and powerful backers. They, therefore, remain above the law.

Concerns regarding Sarao’s culpability in his alleged crimes naturally bite into the ability of Deutsche Bank to effectively buy immunity (albeit temporarily) from being prosecuted. The unvarnished truth is that in proceedings initiated by the US Department of Justice, a subsidiary of Deutsche Bank AG called DB Group Services UK Limited agreed to plead guilty to a criminal charge of wire fraud and Deutsche Bank AG entered into a deferred prosecution agreement which ensured continued cooperation with the American authorities on the understanding that criminal wire fraud and antitrust charges will be deferred.

7.2. Commodities Futures Trading Commission

The Order instituting proceedings pursuant to sections 6(c) and 6(d) of the Commodity Exchange Act (making findings and imposing remedial sanctions) makes quite interesting reading. The CFTC’s Order, which entails a penalty of US$800 million and requires adherence to specific undertakings, in respect of Deutsche Bank AG means that more than US$4 billion in fines arising out of LIBOR and FX benchmark abuses have been imposed on thirteen banks and brokers. Deutsche Bank perpetrated acts of false reporting and attempted manipulation in manipulating LIBOR (for US Dollar, Yen, Sterling, and Swiss Franc) and EURIBOR rates. At times it succeeded in its manipulation and it was also charged with aiding and abetting the attempts of traders at other banks to manipulate Yen LIBOR and EURIBOR. The CFTC took the view that in collaboration with its traders and benchmark submitters, Deutsche Bank deliberately manipulated the market in order to benefit cash and derivatives trading positions that were priced off of LIBOR or EURIBOR.

These two benchmarks are the foundation for trillions of dollars of financial instruments, particularly derivatives contracts, that include futures contracts and interest rate swaps.

Based on open interest and notional value of trading volume and settled against US Dollar LIBOR, the Eurodollar futures contract traded on the CME is one of the largest futures contract in the world. Similarly, rates for consumer loans, such as mortgages, student loans, car loans, and credit card accounts, are tied to LIBOR. Markets, investors and consumers around the world rely on the integrity of these benchmark rates.

In his comments vis-à-vis the penalty, which is the largest ever to be imposed by the regulator, the CFTC’s Director of Enforcement Aitan Goelman said that the bank’s “culture allowed such egregious and pervasive misconduct to thrive” and he said that his department would be “relentless” in seeking out and destroying misconduct so that “the public can be confident in the integrity of these benchmarks.” Deutsche Bank is said to have cooperated with US authorities. In summary, the CFTC found that:

  • over a more than six-year period, from at least 2005 through early 2011 (the relevant period), and across currencies, Deutsche Bank’s submitters routinely took into account other Deutsche Bank traders’ derivatives trading positions, as well as their own cash and derivatives trading positions, when making the bank’s LIBOR and EURIBOR submissions;
  • the conduct of Deutsche Bank’s submitters, traders, desk managers, and at least one senior manager was systemic and pervasive, occurring across multiple trading desks and offices located in London, Frankfurt, New York, Tokyo (a subsidiary of Deutsche Bank), and Singapore;
  • the cash and derivatives trading on the desks responsible for Deutsche Bank’s misconduct increased throughout the relevant period and the desks generated significant revenues for Deutsche Bank, particularly during the global financial crisis of 2007 through 2009;
  • that Deutsche Bank allowed submitters and traders to prioritise profit motives over appropriate submission considerations, permitted a culture of trader self-interest to exist, and created conflicts of interest, which allowed the misconduct to occur; for example, certain managers encouraged continual information sharing between derivatives traders, money market traders, and submitters for the various benchmarks, even restructuring business lines such that derivatives traders and submitters sat together in the London office;
  • in this environment, traders often shouted their requests for beneficial submissions across the trading floor to the submitters;
  • a senior manager regularly sat with the traders and encouraged them and their counterparts in other offices to communicate and exchange trading positions, so submitters became clearly aware of the submissions that were most favourable to the various desks’ trading positions;
  • senior desk managers in London, Frankfurt, New York, and the Tokyo subsidiary of Deutsche Bank also made requests to benefit their own trading positions, facilitated their traders’ requests for beneficial submissions, and promoted the profit-driven submission practices to help the traders increase profits and minimise losses on their and the desk’s trading positions;
  • despite the obvious conflict of interest, Deutsche Bank allowed at times its traders who primarily traded derivatives, such as its Yen derivatives trader, to be responsible for the Bank’s submissions, thus making it easy to skew the bank’s submissions to benefit their own positions and to accommodate the requests of their fellow derivatives traders;
  • these practices continued even after the British Bankers’ Association, the trade association responsible for the issuance of LIBOR, clarified in June 2008 that submissions should not be made by persons responsible for a bank’s derivatives trading book, but rather should be made by persons responsible for the management of the bank’s cash;
  • Deutsche Bank’s Yen derivatives trader used his dual role as trader and submitter to assist the senior yen trader at UBS in his massive scheme to manipulate Yen LIBOR over the same relevant period;
  • Deutsche Bank lacked internal controls, procedures, and policies concerning its LIBOR and EURIBOR submission processes, and failed to adequately supervise its trading desks and traders to ensure that Deutsche Bank’s LIBOR and EURIBOR submissions reflected an honest assessment of the costs of borrowing unsecured funds in the interbank markets;
  • these failures amplified the potential for misconduct and permitted the misconduct to continue for a number of years;
  • Deutsche Bank’s misconduct occurred even after the CFTC’s Division of Enforcement requested in April 2010, that Deutsche Bank conduct an internal investigation of its US Dollar LIBOR submission practices;
  • Deutsche Bank did not make meaningful improvements in its internal controls until mid-2011, and did not formalise a policy about conflicts of interest among traders and submitters relating to benchmark submissions until February 2013.

7.2.1. Other US Fines

In addition to the CFTC, the US Department of Justice has also hit Deutsche Bank with a financial penalty of US$775 million. Furthermore, the New York Department of Financial Services has imposed a fine of US$600 million on the rogue bank for its rampant misconduct.

7.3. Financial Conduct Authority

On this side of the Atlantic, the FCA’s final notice penalising Deutsche Bank in the sum of £227 million, in accordance with section 206 of the Financial Services and Markets Act 2000, reveals a lot about the bank’s misconduct. Deutsche Bank settled at an early stage of the investigation, qualifying for a 30% discount on its fine. Without the discount, the fine would have been £324 million. The bank breached principle 3 (taking reasonable care to organise and control affairs responsibly and effectively, with adequate risk management systems), principle 5 (observing proper standards of market conduct) and principle 11 (cooperating with the regulator) of the FCA’s Handbook: see the principles.

Whilst the FCA did not conclude that Deutsche Bank participated in misconduct as a firm, the authority nonetheless took the view that the bank’s mangers and employees were (minimally) deliberately reckless. Coupled with infrastructural issues connected to systems and controls, the bank’s cultural problems expanded the patterns of misconduct and allowed them to endure for a prolonged period of time.

The FCA’s acting director of enforcement and market oversight Georgina Philippou was of the view that Deutsche Bank stood out “for the seriousness and duration of the breaches” and that fact was “reflected in the size of [the] fine.” Arguing that Deutsche Bank’s case demonstrated the seriously of the bank’s failure to cooperate with the FCA’s investigations and its resolve to take action against wrongdoing, she added that:

One division at Deutsche Bank had a culture of generating profits without proper regard to the integrity of the market. This wasn’t limited to a few individuals but, on certain desks, it appeared deeply ingrained … Deutsche Bank’s failings were compounded by them repeatedly misleading us. The bank took far too long to produce vital documents and it moved far too slowly to fix relevant systems and controls.

For five years (between January 2005 and December 2010) trading desks at Deutsche Bank manipulated its IBOR (i.e. LIBOR and EURIBOR) submissions across all major currencies.

Numerous individuals (a minimum of 29 Deutsche Bank including managers, traders and submitters) primarily based in London but also in Frankfurt, Tokyo and New York were involved in the misconduct. The FCA was particularly concerned about Deutsche Bank’s misconduct as regards EURIBOR because these exemplified the seriousness of the bank’s failings and the potential they had to significantly impact the markets. According to the FCA, traders at Deutsche Bank used a threefold method to attempt to maximise the impact on EURIBOR:

  • to influence Deutsche Bank’s submitters to alter the bank’s EURIBOR submissions;
  • to collude with other banks that sat on the panel that submitted the rates on which EURIBOR is based and request that they alter their submissions; and
  • on occasion to offer or bid cash in the market to create the impression of a change in the supply of funding in order to influence other panel banks to alter their submissions.

Drawing attention to the fact that it synchronised its actions with the American authorities, the FCA explained in its final notice that:

  • misconduct went unchecked because of Deutsche Bank’s inadequate systems and controls; the bank did not have any systems and controls specific to IBOR and did not put them in place even after being put on notice that there was a risk of misconduct;
  • alarmingly the bank had defective systems to support the audit and investigation of misconduct by traders – the systems for identifying and recording traders’ telephone calls and for tracing trading books to individual traders were inadequate owing to which it took over two years to identify and produce all relevant audio recordings requested by the FCA;
  • the bank also failed to deal with the FCA in an open and cooperative way and gave the FCA misleading information about its ability to provide a report commissioned by the German regulator, the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and the bank did not disclose the report to the FCA and claimed that BaFin had prevented it from being shared when this was untrue;
  • moreover, the bank deplorably provided the FCA with a false attestation that stated that its systems and controls in relation to LIBOR were adequate; this was despite the complete lack of IBOR systems and controls; it was known to be false by the person who drafted it;
  • the banks misconduct was further aggravated by the fact that it hampered the FCA’s investigation (by causing hardship and delay) because of a failure to provide timely, accurate and complete information; and
  • in one instance, the bank in “error” destroyed 482 tapes of telephone calls, which fell within the scope of an FCA notice requiring their preservation and it also provided inaccurate information to the regulator about whether other records existed.

8. Conclusion

8.1. Comparative View

Deutsche Bank’s case shows that the benchmark manipulation had been taking place as far back as 2005. This makes it evident that the regulators kept their heads in the sand for a decade before action was taken against the bank. If anything, their lethargic performance is totally at variance with the ultra-fast light speed world of the financial markets. (Albeit, unlike the CFTC the FCA can find limited comfort in Deutsche Bank’s dilatory tactics in the process of being investigated.) In the round, the severity of the penalty given to Deutsche Bank and the heightened media coverage received by the event does very little to alleviate the lack of credibility that is discernable when we juxtapose the case of the individual corporate criminal (Navinder Singh Sarao) with the litany of crimes committed by those operating from, or on behalf of, a large and powerful global financial institution (Deutsche Bank).

The illusion that the regulatory authorities have sought to create by imposing record fines on Deutsche Bank in tandem with arresting Sarao is certainly no accident because it purports to give a balanced image of the law enforcement authorities flexing their muscles to combat misconduct. However, it is submitted that the authorities have been unsuccessful in veiling the truth and in reality the coincidence only serves to amplify the unbalanced nature of the divergent manner in which the concept of misconduct has been applied in these two separate cases. Rightly or wrongly, an obscure Londoner has been made public enemy number one by America and resists extradition whereas a deliberately manipulative international bank has been able to enter into a deferred prosecution as regards criminal wire fraud and antitrust charges in exchange for paying a penalty and continuing cooperation with the Department of Justice. This scenario raises concerns in relation to whether the criminal law still plays any part in proceedings against international banks or whether it is effectively a dead letter?

Whilst the authorities’ desire to demonstrate that the rogue trader problem is totally under control is understandable, we must not lose sight of the fact that the rogue trader in question was not a bank functionary and was therefore in a position of inferiority in comparison to those involved in benchmark manipulation. Since the gravity of Deutsche Bank’s manipulation easily surpasses Sarao’s actions, it is out of kilter with common-sense for him to be in more trouble with the law than the corrupt personnel of the bank: see 8.4. Epilogue below.

8.2. Public Opinion: Internet Voices

In addition to Nick Leeson’s analysis that Sarao is a likely scapegoat and he may not have foreseen the consequences of his action, the respected figure of John Hempton (manager, Bronte Capital Management) has argued that Sarao is a “hero” because his actions made financial markets “safe for ordinary investors”. According to Hempton, the belief that the crash was caused by the mere trading of a few thousand futures contracts by Sarao is nothing short of “ludicrous”.

In response to a taunt (“Hope you’ll be contributing to your hero’s defence fund?”, April 23, 2015 at 8:48 PM ) from an anonymous person commenting on the Bronte Capital blog, Hempton sharply retorted that “I probably will contribute to his defence” (April 23, 2015 at 9:12 PM ). On the other hand, another comment on the blog (April 23, 2015 at 11:43 PM ) maintains that Sarao knew “what he was doing was wrong … he lied to the software developer about it and then lied to his brokerage about it and he was caught when the brokerage filed Suspicious Activity Reports.”

In any event, even the anonymous person taunting John Hempton hopes that the UK will stand up for Sarao. Similarly many others have called on the UK courts not to cede ground to the Americans by refusing to extradite him.

8.3. Extradition Analysis

A review date of Sarao’s case is scheduled for 26 May 2015. However, the date for a full extradition hearing has been postponed from August to 24-25 September 2015.

Insofar as the Americans are concerned, the US/UK Extradition Treaty of 2003, which operates in the UK through the Extradition Act 2003, is necessary to maintain the rule of law and it is “predicated on trust, respect, and the common goals of protecting our nations and eliminating safe havens for criminals.” They say that the treaty is not unfairly balanced in America’s favour because Sir Scott Baker’s review found it to be “fair” and the number of US requests to be proportionate. The government commissioned that report with a view to reviewing the operation of the Extradition Act 2003, with particular emphasis on the operation of the controversial US/UK extradition treaty.

The treaty is said to achieve superior alignment in the US/UK extradition relationship by correcting the past imbalance that required the Americans to furnish in “prima facie” evidence whereas they had never required the same from the British. The treaty turns on the “dual criminality” test and a person is not extraditable by either country unless the offence is a crime in both countries and carries a minimum prison sentence of one year.

Sir Scott Baker, whose review is considered to be as controversial as the treaty itself, found no basis for renegotiating the treaty and concluded that:

The United States and the United Kingdom have similar but different legal systems. In the United States the Fourth Amendment to the Constitution ensures that arrest may only lawfully take place if the probable cause test is satisfied; in the United Kingdom the test is reasonable suspicion. In each case it is necessary to demonstrate to a judge an objective basis for the arrest. There is no practical difference between the two tests and the 2003 Treaty does not operate in an unbalanced manner. Nor is there any basis to conclude that extradition from the United Kingdom to the US operates unfairly or oppressively.

The Americans are at pains to point out that, under the treaty, they have never turned down an extradition request from the UK whereas the UK has denied 10 requests by the US. They cringe at the thought of people seeking redress from extradition by obtaining relief from the European Court of Human Rights because availing the processes of the Strasbourg Court may cause serous delays (measurable in the decades) that “frustrate” the legal process.

In the numerical assessment evidenced in Sir Scott Baker’s review, apart from the 10 refused requests out of a total sample of 130 cases, 77 individuals have been extradited from the UK to the US under the treaty and the remaining 43 cases remained pending in the UK, or the persons returned to the US of their own volition (or other circumstances made extradition redundant). Conversely, of a total of 54 UK requests 38 resulted in extradition whereas the remaining 16 cases became redundant.

Unsurprisingly, the legislative changes packaged in Part 12 (Extradition) of the Anti-social Behaviour, Crime and Policing Act 2014 do nothing to disturb the US/UK extradition relationship. Therefore, in light of Sir Scott Baker’s analysis and the statistics on Anglo-American extradition arrangements, Sarao’s chances of escaping American justice look rather slim.

In fact he was warned by David Bermingham (extradited for the £53 billion Enron collapse) not to resist extradition and to get on a plane “and negotiate the best deal he can possibly get if he has done something wrong” because “all holding out does is to make things worse.”

8.4. Epilogue

A cacophony of voices can be heard in the foregoing paragraphs and it aids our analysis to draw upon Roger McCormick’s argument that the regulators should not frightened of bringing a bank down (even one which is on the verge of collapse) and that patience is running out with leniency being afforded to corporations who plead ignorance and defend themselves with “it’s not our fault, we didn’t know.” From that perspective, some of the email correspondence disclosed with the fines against Deutsche Bank directly contradicts the plea of ignorance and denial of knowledge of wrongdoing. For example, the following extract from a series of remarkable/inculpating emails (originating as far back as 2005) demonstrates the shocking level of venality prevalent in the bank’s trading culture – it really is the icing on the bank’s cake of corruption:

Deutsche Bank Employee: This “is a corrupt fixing and DB is part of it!”

Deutsche Bank Employee Seeking to Obtain Lower Rate: “I’m begging u, don’t forget me… pleassssssssssssssseeeeeeeeee… I’m on my knees…”

Moreover, the FCA’s notice is full of useful information as well. For example, in December 2006, Deutsche Bank’s three month EURIBOR submission was 3.70 or a 3 basis point drop in comparison to the day before because:

Manager B: “… could I beg you for a low 3M [EURIBOR] fixing today please. Thant would be the best XMAS present ;-)”

Submitter C: “… Be a pleasure, no probs we have nothing on the other side here. Will put in 71 [3.71] at least maybe we cld [could] in 70 [3.70] …”

Manager B: “Low as possible please as we have 2.5 yards [2.5 billion] on it today, so will be very helpfull”.

Plainly, Sarao does not possess the kind of money that can save him in his hour of need whereas Deutsche Bank did have large sums of money (i.e. deposited funds) to get an advantageous deal to save itself and its swindling traders and managers. Whilst the FCA’s notices and website are an excellent source of information on misconduct in the normal course of things, it is rather ironic that a search for “Sarao” on the FCA’s website produces zero results. Did Sarao intend to crash the market? The aim of spoofing is to attempt to produce minor predictable movements in the market from which the spoofing trader can earn a small profit. Repeating the cycle allows the spoofer to make money and the gradual accumulation of profits from such activity serves as a weighty reason for not crashing the market. So maybe, he was just in the wrong place at the wrong time. It has also been suggested that his fraudulent technique was not cutting-edge or high-tech; he did not possess the capacity to be a predatory high-frequency trader.

Even if it is assumed that Sarao’s behaviour was high-frequency, the senior figure of Arthur Levitt (who used to be in-charge of the US Securities and Exchange Commission during the 1990s) has emphasised the need to distinguish good and bad actors. He explained in April 2014 that not every high-frequency trader is predatory “and some … respect the sanctity of the investor, and some … don’t.” In a similar vein, in February 2015, Steven McNamara also argued that high-frequency trading “is part of the transformation of the equity markets that has greatly reduced transaction costs for many investors, and so has brought great benefits.” For McNamara, “other practices such as momentum ignition, spoofing, and layering are merely high-tech versions of traditional market manipulation.”

Is Sarao a criminal mastermind or a sacrificial lamb? Viewed in light of the points set out above, he is increasingly looking more like the latter.

On day one (21 April 2015) when Sarao’s story broke, the notion that he was the Bin Laden of the world of financial crime may have been momentarily well received. But with the passage of time he looks more and more like a scapegoat, indeed a sacrificial lamb, in America’s manhunt for its “most wanted” criminals who must be brought to justice.

It is equally clear that reliance placed in the adage “it’s not our fault, we didn’t know” is easily debunked because employees in Deutsche Bank were quite well aware of the nature and quality of their actions (which were rather deliberate). Manager B and Submitter C were intentionally fixing EURIBOR by 3 whole basis points: there are no two ways about that. The bank’s attempts to bolster its reputation by casting false impressions about its creditworthiness vividly bring to mind the picture of Baron Münchhausen pulling himself up by his own pigtail.

None of the above comments should be read as taking sides. This article does not intend to defend Sarao or bash Deutsche Bank. Instead, it merely serves to illustrate the divergence between the methods employed to prosecute a lone rogue trader in comparison to those used to punish a leading international bank. In light of the comparison, it is strongly arguable that the hierarchy established in Seven Deadly Sins has effectively been turned on its head and as argued above Case 5: “Individual Criminality” has come to trump Case 1: “Clustered Criminality”. This is made all the more controversial by the fact that Deutsche Bank deliberately flouted the rules rather than genuinely misunderstanding the nature of the legal and ethical duties that it owed. In the final analysis, because “the eighth deadly sin” is ‘to fail to recognise that there is more than one side to the conduct story” – the other side of the conduct story being the issue of double standards in pursuing criminal prosecutions in the cases of misconduct juxtaposed above – the inversion of the hierarchy of culpability is without doubt the ninth deadly sin! In an inverted hierarchy, the “deadliest sin”.



23 responses

29 04 2015

A UK financial trader accused of contributing to the 2010 Wall Street “flash crash” has been remanded in custody and granted a second week to raise £5.05m in bail.

Navinder Singh Sarao first appeared at Westminster Magistrates’ Court last Wednesday,

He failed to make bail last week. He will appear in court again on 6 May.

Mr Sarao, who wore a grey sweater and tracksuit trousers in court, has said he will oppose extradition to the US.

He spoke only to confirm his date of birth and address.

Mr Sarao has been charged by the US Department of Justice (DoJ) with wire fraud, commodities fraud and market manipulation.

A review date of the case remains as 26 May, but the date for a full extradition hearing has been pushed back from August to 24-25 September.

1 05 2015
4 05 2015
6 05 2015

Wed May 6, 2015 6:58am EDT

Accused ‘flash crash’ trader tells UK court: ‘I did nothing wrong’
(Reuters) – The British trader fighting extradition to the United States on charges of having contributed to the 2010 “flash crash” on Wall Street told a London court on Wednesday he had done nothing wrong and was just good at his job.

Navinder Singh Sarao, 36, who traded from his parents’ modest home in west London, has been charged by the U.S. Justice Department with wire fraud, commodities fraud and market manipulation.

“I’ve not done anything wrong apart from being good at my job. How is this allowed to go on, man?” Sarao said at Westminster Magistrates’ Court.

Two weeks ago, Sarao was granted bail pending a full extradition hearing later this year provided he produced just over 5 million pounds ($7.6 million) and met other conditions.

But his lawyer James Lewis said Sarao had not been able to access the 5 million pounds because U.S. authorities had frozen his assets.

“We cannot obtain any money. Any request to obtain the money was refused,” Lewis told the court.

He asked for the bail surety to be lowered to 50,000 pounds on Wednesday but the application was rejected by District Judge Elizabeth Roscoe, and Sarao remains in custody.

“I will not vary bail. I will leave it as it is,” Roscoe told Sarao and his legal team, who said they would consider an appeal to London’s High Court.

Sarao, dressed in a gray sweatshirt and gray tracksuit bottoms, had sat calmly in the dock until he heard his bail conditions would not be changed, and then spoke out to the court to plead his innocence.

14 05 2015

Flash Crash trader gets legal aid to fight extradition, Navinder Sarao is appealing his bail conditions and challenging US attempts to extradite him

Navinder Sarao, the trader accused of playing a role in the “flash crash” in 2010, has been granted legal aid as he tries to fight extradition to the United States and a £5m bail requirement that he has so far failed to pay.

Mr Sarao has been in custody since his arrest on April 22 on US charges of market manipulation, wire fraud and commodities fraud. He faces weekly hearings at Westminster Magistrates’ Court because he has been unable to meet the conditions of his bail.

The court heard on Wednesday that Mr Sarao has recently won legal aid, enabling his team of lawyers to begin work on the case against extradition. His appeal against his bail conditions, meanwhile, will be heard by the High Court on May 20.

At the centre of the bail issue is a worldwide freezing order on Mr Sarao’s assets, imposed by the US authorities around the time of his arrest. The criminal complaint against him lists several companies in the Caribbean and he has £5m in funds and loans in a trading account, but Mr Sarao is unable to access his money.

District Judge Elizabeth Roscoe denied a request to alter the bail terms last week, prompting an outburst of frustration from Mr Sarao. “I’ve not done anything wrong, apart from being good at my job,” he said at the time.

Mr Sarao did not speak in court on Wednesday, except to confirm his identity. He is accused of spoofing the E-Mini S&P derivatives market over a five year period, including the day of the flash crash.

The crash began in the E-Mini market on May 6, 2010 before spreading to the underlying stocks and shares, sending the Dow Jones on a 1,000-point lurch in a matter of minutes. The US financial regulators said shortly after the short-lived crash that a large sell order for E-Mini contracts had prompted the market maelstrom.

A review hearing for the extradition proceedings is due to take place on May 26, but could be moved back to accommodate the delays in funding Mr Sarao’s legal team.

20 05 2015

By James Titcomb, 5:39PM BST 19 May 2015

Navinder Sarao, the British day-trader who is accused by US authorities of contributing to 2010’s Wall Street “Flash Crash”, could be released from custody on Wednesday if he wins an appeal.

The 36-year-old, who is facing extradition to the US on multiple fraud charges, has been unable to meet the conditions of his bail, which require him to put up £5m of his own money.

Mr Sarao’s assets have been frozen as part of the US investigation into his trading, meaning he has no way of obtaining the funds. At the High Court on Wednesday morning, lawyers will argue for looser bail conditions, offering to put up funds provided by his family.

Since dubbed the “Hound of Hounslow”, Mr Sarao has been in custody since his dramatic arrest on April 21. On Tuesday, he appeared at Westminster Magistrates’ Court for the fifth week in a row for a regular bail hearing.

Mr Sarao, dressed in a grey sweatshirt and tracksuit bottoms, spoke only to confirm his name and date of birth, and to confirm he understood the judge’s instructions. Richard Egan, Mr Sarao’s lawyer, said it would be “illegal” for him to recover the £5m, held in a frozen trading account, that would allow him to meet his bail conditions.

The US government has accused Mr Sarao of playing a major part in the 2010 crash, in which hundreds of billions of dollars was wiped off the value of US stock markets. It accused him of 22 counts of illegal trading, which carry a combined prison sentence of up to 380 years.

Mr Sarao is said to have committed fraud by “spoofing” – submitting trade orders but cancelling them before they are fulfilled – in order to manipulate the market and make a profit. The former City trader, described as highly talented by colleagues, operated a trading business from his parents’ house in south-west London.

Two weeks ago, he broke his silence in court, angrily declaring: “I’ve not done anything wrong, apart from being good at my job. How’s this allowed to go on, man?”

Last month, he was told his family would have to hand in passports and he would have to visit a police station three times a week, as well as paying the money, if he is released.

Richard Egan, Mr Sarao’s solicitor, said that he could be released as early as Wednesday, if the appeal is successful.

21 05 2015

Simon Goodley, Wednesday 20 May 2015 12.13 BST

Navinder Singh Sarao is accused of triggering a stock market crash in 2010 from his parents’ home.

British financial trader, who is battling extradition to the US on 22 counts of fraud and commodity manipulation, must remain in custody.

The British financial trader accused of contributing to a multibillion-dollar stock market crash in the US from his parents’ suburban London home, will remain in custody after his appeal to vary his bail conditions was refused.

Navinder Singh Sarao, 36, who is fighting extradition to the US on 22 counts of fraud and commodity manipulation, has been prevented from paying his £5m bail by a worldwide freezing order. He has requested he be freed from Wandsworth prison after his parents provided a £50,000 surety. He denies the charges against him.

However, following a hearing in the high court in London on Wednesday, Mr Justice Cranston ruled: “I accept Mr Summers’ submission [for the US government] that until the applicant demonstrates that he has no access to any funds anywhere, so as to provide reassurance that any court in the world would want, the application is premature.”

Sarao was arrested last month after the US Department of Justice claimed he had made $40m (£27m) by “spoofing” financial markets, using commercially available trading software to place $200m of false trades from his parents’ home in Hounslow, west London.

The Americans said Sarao’s supposed manipulation contributed to the so-called flash crash on 6 May 2010, when the Dow Jones industrial average plunged 600 points in five minutes, creating havoc on Wall Street.

The trader has been remanded in custody for four weeks after his arrest last month, when his bail was set at just over £5m. His lawyers had said Sarao’s trading account contained the funds, but they have since learned that his assets were subject to a freezing order by the US authorities, which made it impossible to produce the money.

James Lewis QC, representing Sarao, told the court it was “impossible and unlawful for [Sarao] to comply with this condition. If it was right in principle to grant bail, it must follow that the conditions of bail [do not make it impossible].”

Lewis argued that Sarao should be freed to await a full hearing on his extradition starting in September, which is expected to last about a year, on the strength of the £50,000 already provided as security by his parents. He also told the court that the trader’s parents had offered to put up their home in Hounslow, on which they have paid the mortgage, as further security.

However, Mark Summers QC, representing the US authorities, told the court that Sarao faced “exceptionally serious allegations” and had “lied” to financial regulators when he claimed to be operating with “basic trading software”. He added that Sarao faced a lengthy prison sentence in the US if extradited and convicted, as well as the disgorgement of the alleged $40m in profits.

“This is a man with every reason to avoid that prospect,” he said. “He is a man whose attitude to all of this should give the court no comfort at all. When regulators and the stock exchange asked him about his activities he lied about using tailored software to undertake his activities.”

Summers added that the scale of Sarao’s alleged profits meant that the “idea that he couldn’t compensate his parents [if he skipped bail] is unrealistic.”

Sarao’s lawyers said the judge had “left the door slightly ajar” for them to return to court after providing further information on Sarao’s assets.

21 05 2015

by Suzi Ring

Sarao Loses Bail Appeal as Judge Says He Is a ‘Flight Risk’

Navinder Singh Sarao lost a bid to secure bail while he fights extradition to the U.S. on market-manipulation charges as a judge said the 36-year-old trader was a clear flight risk.

Judge Ross Cranston refused to remove or reduce the 5 million-pound ($7.8 million) bail amount at a hearing in London Wednesday unless Sarao can prove he does not have access to undisclosed offshore funds holding his trading profits.

Sarao was charged last month by U.S. prosecutors with 22 counts of fraud and market manipulation. He was responsible for one in five sell orders during the frenzy on May 6, 2010, when investors saw almost $1 trillion of value erased from U.S. stocks in minutes, according to U.S. authorities. He is subject to a worldwide asset freezing order, which means he is unable to pay the bail money, according to his lawyers.

Sarao’s lawyer, James Lewis, tried to argue a 50,000 pound-surety from his parents, who were at the hearing, was enough to secure his release without Sarao posting 5 million pounds himself.

He told the judge Sarao was from a “close-knit family” and it was “inconceivable” he would flee and allow them to lose their life savings. The parents also offered their house as a surety, an offer U.K. courts rarely accept from relatives of defendants.
$40 Million

Cranston said 50,000 pounds compared with the $40 million in profits U.S. prosecutors say Sarao has made was “no assurance at all,” and the fact he has no partner or children means he doesn’t have strong enough ties to keep him in London.

Sarao faces the prospect of months in London’s Wandsworth prison before the extradition is settled. Lewis said he was “fairly certain proceedings wouldn’t conclude this year” before any appeals are exhausted.

While another lawyer for Sarao, Richard Egan, said he was disappointed, Cranston’s ruling leaves some hope of release before an extradition hearing scheduled in September.

It “appears the door has been left open slightly ajar” to come back again if we can show he has no other access to assets, Sarao’s lawyer Richard Egan said after the hearing. “Obviously we’re disappointed.”

Sarao, who defiantly protested his innocence at a hearing two weeks ago, didn’t attend today’s proceedings.

The case is Sarao v. United States of America, High Court of Justice, Queen’s Bench Division, NO. CO/2116/2015

21 05 2015

No Reduced Bail for ‘Flash Crash’ Trader


LONDON — A London judge on Wednesday denied an appeal by Navinder Singh Sarao, the futures trader accused of playing a major role in causing the “flash crash” of 2010, to reduce his bail after the United States government froze his assets worldwide.

Mr. Sarao’s lawyers said it would be unlawful for Mr. Sarao to gain access to his money because of the asset freeze, a situation that makes it impossible for him to pay 5 million pounds, or about $7.8 million, of the £5.05 million bail set last month in a district court. His parents and brothers have already paid £50,000.

“There is no substantial reassurance that this applicant is not a flight risk,” Judge Ross Cranston said at the appeal hearing in London on Wednesday. “Fifty thousand pounds, compared with what is alleged to be $40 million in profits he has made, is no assurance at all.”

Mr. Sarao, 36, who traded from his parents’ home in West London, was arrested on April 21 and charged by the United States government with 22 counts of fraud and manipulation. He is fighting extradition.

Mr. Sarao’s lawyers argued that his relatives had used their life savings to meet a court order requiring them to pay £50,000 of the bail, and had surrendered their passports. Mr. Sarao, who has lived with his parents for his whole life and does not own a car, would not put the family’s life savings at risk by fleeing, they said.

“They are an ordinary, hard-working family,” one of his lawyers said.

The United States government argued that the bail conditions set by a district judge were appropriate considering the serious charges being brought against Mr. Sarao and the flight risk he posed. Judge Cranston concurred.

Mr. Sarao is accused of helping to cause the so-called flash crash of May 2010, when American stock markets plummeted more than 1,000 points in a matter of minutes. Although the markets recovered their losses quickly, the events rattled investors and confounded regulators, who charged Mr. Sarao five years later after receiving help from an informant.

Richard Egan, one of Mr. Sarao’s lawyers, said after the decision on Wednesday that he was “disappointed that he’s in the situation that he’s in,” but he added that the judge had left open the possibility of Mr. Sarao’s being released if he could prove that he had no access to funds.

He has been in jail since his arrest.

The American government has requested that Mr. Sarao identify all of his assets, including those outside the United States.

“We believe everything he owns has been restrained,” Mr. Egan said.

Mr. Sarao’s parents and brother appeared in court. They sat quietly through the proceedings, and his mother often closed her eyes. They left quickly after the end of the hearing.

21 05 2015

Flash crash’ trader Sarao denied bail as High Court rules he poses a clear flight risk

The British financial trader accused of helping to trigger the 2010 Wall Street ‘Flash Crash’ lost a legal bid for bail after a High Court judge ruled he posed “a clear flight risk”.

Navinder Singh Sarao, 36, was seeking release from Wandsworth prison as he fights extradition to America.

The extradition battle is expected to take many months.

Mr Sarao was arrested on 21 April at the request of the US authorities, who want him extradited to face allegations that he helped cause the multibillion-dollar US stock market crash from his parents’ home 3,500 miles away in Hounslow, west London.

The US Justice Department claims Mr Sarao and his company, Nav Sarao Futures Limited, made £26m illegally by manipulating the market over a five-year period. He faces 22 charges including wire fraud, commodities fraud and market manipulation and faces long jail sentences if convicted.

Lawyers for the trader, who operated from his parents’ home in Hounslow, west London, said a bail condition imposed at Westminster Magistrates’ Court that he personally pay a £5m security was impossible to comply with – and therefore unlawful – because US authorities had obtained a worldwide freezing order on his assets.

James Lewis QC, for Mr Sarao, said the trader’s parents had offered £50,000 as a surety and were also offering to put up the value of their house as bail. He said it was ‘manifestly unjust and unlawful” Mr Sarao had been denied bail by conditions that were “unnecessary and impossible to fulfil”. He said Russian oligarchs facing extradition had not faced such conditions.

Mr Sarao, British-born, schooled in Hounslow and who went to university in London, was from “a very tight-knit and close family”. He had lived in family home with his parents all his life, had no car and there was no prospect of him risking their life savings by absconding.

But Mark Summers QC, for the US government, opposing bail and said the parents’ bail money and the value of their house was a “derisory” amount and “small change” compared with “the $40m dollars of criminal profit” Mr Sarao allegedly had at his disposal.

He claimed Mr Sarao had no real ties to the UK, was single and had no children and had previously lied to regulators about how he traded. The trader needed to reveal all his worldwide funds in order to provide reassurance he wouldn’t flee.

Mr Justice Cranston refused to vary bail conditions. “There is a clear flight risk” without the £5m security, he said.

The £50,000 – compared with the alleged £40m profits Mr Sarao had made – was “no assurance at all”.

The jailed trader’s solicitor, Richard Egan, said the Sarao family were “obviously disappointed”, but added: “The door has been left slightly ajar for us to come back again.”

21 05 2015

‘Flight risk’ flash crash trader to remain in jail after losing bail appeal

By Marion Dakers, Financial services editor 11:45AM BST 20 May 2015

Navinder Sarao will remain at Wandsworth prison after losing a High Court application to change his bail terms.

The court ruled that a requirement to pay a £5m security should stay in place, describing the trader as “a clear flight risk”.

Mr Sarao’s lawyer, Richard Egan, said “the door has been left slightly ajar” by Mr Justice Cranston’s comment that the court needed reassurance that Mr Sarao had no access to any funds to pay the sum, under the terms of a worldwide freezing order.

“Obviously we are disappointed that he’s left in the situation that he is in,” said Mr Egan.

Mr Sarao’s parents and brother attended the hearing but declined to comment.

The trader is fighting extradition to the US on 22 counts of illegal trading, which carry a maximum prison sentence of 380 years. A full extradition hearing is scheduled to take place in September and is expected to take several months.

Mr Sarao, a 36-year-old from Hounslow, has been in custody since his arrest on April 21. He was granted bail shortly afterwards but has been unable to pay the £5m security to meet the conditions of his release.

Mr Sarao has appeared weekly at Westminster Magistrates’ Court, as required for those unable to meet their bail conditions, but the court has declined to alter the terms.

His lawyers have argued that his assets are subject to a worldwide freezing order imposed by the US authorities, meaning it would be unlawful for him to pay the £5m. His family has already paid a separate £50,000 security.

James Lewis QC, representing Mr Sarao, argued on Wednesday that the trader “has no assets whatsoever available to him” to fund the bail payment, and that he has spent his life in a “tight-knit and close family. He doesn’t even own a car.”

Mark Summers QC, acting for the US government, said that Mr Sarao “is a man whose attitude to this should give the court no confidence at all”, referring to the US criminal complaint that alleges he told the Chicago Mercantile Exchange to “kiss my ass” when it contacted him about his trading. Mr Summers told the court that Mr Sarao was a “quintessential flight risk”.

The US Department of Justice and the US Commodity Futures Trading Commission have charged Mr Sarao with manipulating the financial markets, alleging he made more than $40m (£26.7m) from his activities over a period spanning more than five years.

The US authorities claim that Mr Sarao placed “spoof” trades in E-Mini S&P derivatives in a bid to push the market in his favour. The orders would be placed and withdrawn in rapid succession using a customised computer programme, they allege.

The regulators have claimed that Mr Sarao’s trading activity contributed to the Flash Crash on May 6, 2010, when a sell-off in the E-Mini market spread to the underlying stock markets and temporarily wiped almost 1,000 points off the Dow Jones index of blue-chip shares.

Mr Sarao is the first person to face criminal charges in relation to the crash.

27 05 2015

‘Flash crash’ trader challenges bail conditions in high court

Navinder Singh Sarao’s legal team plans to return to the high court for a second time, asking for Sarao to be freed from Wandsworth prison

The British financial trader accused of contributing to a multibillion-dollar stock market crash in the US from his parents’ suburban London home is expected to make a fresh high court challenge against his bail conditions.

Navinder Singh Sarao, 36, is fighting extradition to the US on 22 counts of fraud and commodity manipulation and has been prevented from paying his £5m bail by a worldwide freezing order. He denies the charges against him and has requested he be freed from Wandsworth prison after his parents provided a £50,000 surety.

Sarao was before Westminster magistrates’ court on Tuesday morning for the latest hearing in the case. Appearing in the dock in a grey prison tracksuit, he spoke only to confirm his name and address.

After the brief hearing, his solicitor Richard Egan said his legal team planned to return to the high court for a second time.

In the high court last week, Mr Justice Cranston refused an attempt to vary Sarao’s bail conditions, saying that the application was “premature” until the trader proved he did not have access to any funds.

“It is impossible and in fact illegal to comply with the conditions, we’ll do as much as we can to prove that all the funds have been restricted,” Egan said.

Sarao was arrested last month after the US Department of Justice claimed he had made $40m (£27m) by “spoofing” financial markets, using commercially available trading software to place $200m of false trades from his parents’ home in Hounslow, west London.

US authorities said Sarao’s alleged manipulation contributed to the so-called flash crash on 6 May 2010, when the Dow Jones industrial average plunged 600 points in five minutes, creating havoc on Wall Street.

The trader has been remanded in custody since his arrest last month, when his bail was set at just over £5m. His lawyers had said Sarao’s trading account contained the funds, but they have since learned that his assets were subject to a freezing order by the US authorities, which made it impossible to produce the money.

6 07 2015
Hunter into Prey: City Watchdog Exposes its Achilles’ Heel – Part 1 | Global Corporate Law

[…] for improperly identifying him in April’s historic LIBOR manipulation settlement – which left Deutsche Bank nursing fines totalling $2.5 billion – with American and British regulators. Bittar, who has been privately […]

15 08 2015

By Marion Dakers, and Julia Bradshaw 11:23AM BST 14 Aug 2015

Navinder Singh Sarao, the trader accused of contributing to the 2010 flash crash, has been let out on bail today after the US authorities dropped their opposition to his release. Mr Sarao, who has been in Wandsworth prison since his arrest in April, will be confined to within the M25 ahead of a full extradition hearing next month for a trial in the United States. He is also banned from using the internet for “fiscal transactions”.

To address concerns that Mr Sarao was a flight risk, his US lawyers have set up an escrow account with the US Commodity Futures Trading Commission to hold all of Mr Sarao’s assets, including the £25.5m that he has now revealed is held in Swiss accounts as well as £5m held in a broking account with RJ O’Brien.

Of this sum, roughly £2.5m has been set aside to pay his legal costs. Some of his assets are tied up in long-term investments that cannot be released in full until 2017, but will be added to the escrow account once they are available, the court heard.

As a result, district judge Quentin Purdy at Wesminster Magistrates Court has dropped a requirement for Mr Sarao to post £5m security before his release on bail.

The new conditions enable Mr Sarao to return home to Hounslow, providing the rest of the requirements including reporting in with the police are respected, and ends an impasse that kept him imprisoned for more than 16 weeks. He had previously said he was unable to pay the bail money as all of his funds were subject to a worldwide freezing order, and his lawyers mounted several unsuccessful challenges to the £5m condition including an appeal to the High Court. His family have already paid a £50,000 security into the court as part of the bail conditions that were set in April.

The court was also told on Friday that Mr Sarao has been diagnosed with severe Asperger’s syndrome. The 36-year-old financial trader is accused of helping precipitate a “flash crash” by making bogus offers to trade on one of the worlds’ biggest financial markets. Trades he made from his parents’ house in Hounslow, west London in 2010 coincided with a multi-billion dollar plunge in the value of US shares, in a crash that began in the S&P derivatives market – where Mr Sarao traded almost exclusively – and soon spread to the Dow Jones index. Mr Sarao faces extradition to the US on Department of Justice charges that carry a maximum sentence of 380 years if he is found guilty.
He has denied wrongdoing, telling the court in May: “I’ve not done anything wrong apart from being good at my job.”

15 08 2015

‘Flash crash’ trader released on bail

The British financial trader accused of contributing to a multibillion-dollar stock market crash has been released from prison after being granted bail while he fights extradition to the US.

Navinder Singh Sarao, 36, who faces 22 counts of fraud and commodity manipulation in the US, was set bail of £50,000 at Westminster magistrates court.

He has been held at Wandsworth prison in London, after being denied bail following his arrest in April and losing an appeal in May.

On Friday, district judge Quentin Purdy said Sarao could be released provided he remains within the bounds of the M25. Sarao, who before his arrest lived with his parents in a modest semi-detached house in Hounslow, west London, is also barred from using the internet for any trading.

During the hearing it emerged that Sarao has funds of more than £30m, including £25.5m held in Switzerland, as well as £5m in a US account controlled by his lawyers.

Sarao’s lawyers are trying to transfer the Swiss funds into the US account, to provide surety to US authorities. However, the Swiss authorities will not release the majority of funds until 2017, apart from £5m that will be transferred to the escrow account in October.

The court also heard that Sarao had been diagnosed as having “severe Asperger syndrome” by an expert from Cambridge University.

Sarao, who appeared in court wearing a yellow T-shirt, over a black long-sleeved top, denies the charges against him.

The British trader is accused of manipulating US financial markets and contributing to the flash crash of 6 May 2010, when the Dow Jones industrial average plunged 1,000 points in five minutes, losing 9% of its value and causing panic on Wall Street. The market soon recovered and ended the day 3% lower.

The US Department of Justice alleges that Sarao earned $40m (£26m) by “spoofing” financial markets, which involved using software to place fake trades to move prices up or down.

James Lewis QC, representing Sarao, argued that his client needed to be released from jail to present evidence to a financial expert on his trading activities, as part of his defence against extradition.

Lewis said the trading was “horrendously complicated”, adding he himself had not yet fully understood it. The defence case against Sarao’s extradition had been complicated by the difficulty of finding finance professionals ready to accept the “risible” legal aid fees on offer to expert witnesses, Lewis added. However, the judge denied the defence’s request to delay the extradition hearing, which is scheduled for 24 and 25 September.

Sarao’s lawyers will have the chance at a further court hearing on 28 August to argue for more time to develop their defence.

When he appeared at the high court in May, Sarao protested his innocence: “I’ve not done anything wrong apart from being good at my job.” But in this latest court appearance, he spoke only to confirm his name and understanding of bail conditions.

Lawyers for the US government previously argued that Sarao should not be released on bail until he was able to demonstrate that he had no access to funds.

Sarao was prevented from paying £5m bail demanded in May because of a worldwide freezing order on his funds. Mark Summers QC, representing the Americans, said the US authorities would not oppose the latest application for bail, subject to conditions, including depositing the Swiss funds in an account that can be accessed only by Sarao’s lawyers.

US authorities have accused Sarao of alleged market manipulation over five years and had warned him against his activities as recently as 6 April. But they stopped short of putting all the blame on the Hounslow day trader for the flash crash, arguing that he was “a contributing” factor.

Sarao is alleged to have changed his orders on the day of the flash crash more than 19,000 times before cancelling them, and is said to have made profits of more than $820,000 during a day’s trading.

Last year, Sarao explained his success to the UK’s Financial Conduct Authority by saying that “he had always been good with reflexes and doing things quick”.

19 08 2015
Tom Hayes: Trial By Fire | Global Corporate Law

[…] in this duo of white-collar crime cases is inevitable. It is interesting to note, as I have in the long read on Sarao (the so-called “flash crash” trader), that the criminal law has effectively become a dead […]

29 09 2015
Navinder Sarao: ‘Flash Crash’ Trader’s Extradition Appeal Adjourned | Global Corporate Law

[…] attempts to postpone the hearing scheduled on 25 September 2015 were unsuccessful: see posts here and here. The reasons for postponing the extradition hearing was are related to the fact that the […]

6 10 2015
The LIBOR Trial: Episode Two | Global Corporate Law

[…] for improperly identifying him in April’s historic LIBOR manipulation settlement – which left Deutsche Bank nursing fines totalling $2.5 billion – with American and British regulators. Bittar, who has been privately […]

14 10 2015
Former Rogue UBS Trader Kweku Adoboli Loses Deportation Appeal | United Kingdom Immigration Law Blog

[…] for improperly identifying him in April’s historic LIBOR manipulation settlement – which left Deutsche Bank nursing fines totalling $2.5 billion – with American and British regulators. Bittar, who has been privately […]

19 11 2015
EURIBOR Manipulation: SFO Charges First Individuals | Global Corporate Law

[…] historic benchmark manipulation settlement with American and British regulators which left Deutsche Bank nursing fines totalling $2.5 […]

26 11 2015
Narratives of Misconduct: Emerging Trends in the Finance Sector | Global Corporate Law

[…] historic benchmark manipulation settlement with American and British regulators which left Deutsche Bank nursing fines totalling $2.5 […]

17 12 2015
Case Preview: Macris v FCA: Third Party Rights and FSMA | Global Corporate Law

[…] historic benchmark manipulation settlement with American and British regulators which left Deutsche Bank nursing fines totalling $2.5 […]

28 03 2016
Navinder Sarao: ‘Flash Crash’ Trader’s Extradition Request Upheld | Global Corporate Law

[…] seen on this blog, the Americans have singled Sarao out for his alleged malevolence whereas owing to lack of evidence […]

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