The case of Nav Sarao, the “hound of Hounslow” who faces a potential sentence of 380 years’ imprisonment on 22 counts in the US, has inflamed emotions and commentators have expressed extreme sympathy with the rogue trader who is considered to be the main culprit behind the “flash crash” of 6 May 2010. The disproportionate nature of his predicament is clearly illustrated by the fact that if extradited and punished in America, Sarao may well receive a harsher sentence than Serbian war criminal Radovan Karadic who got 40 years for crimes against humanity and genocide but will enjoy the right to a lengthy appeals process. It has been argued that Sarao had to be caged because he discovered a way to beat the HFTs at their own game. At the time of his arrest, senior traders even made public statements about footing his legal bill. Seldom has a corporate crime case aroused such a passionate response. Fellow traders dubbed Sarao “our spoofing hero” and the case against him was labelled “ridiculous”. Yet in the Westminster magistrates’ court judge Quentin Purdy disagreed and found that Sarao was extraditable to the US on the charges levelled against him. On the other hand, in making factual findings in the case, judge Purdy found that the downturn in the market was not attributable to a single event and the cause of the flash crash “cannot on any view be laid wholly or mostly at Navinder Sarao’s door” because even though he was active on 6 May 2010 the date “is only a single trading day in over 400 relied upon by the prosecution.”
Against this, the Commodities Trading Futures Commission accuses the Brit of exacerbating the flash crash and claims he “was at least significantly responsible for the order imbalances” in the derivatives market which affected stock markets to make matters worse on the day. The judge found that if found guilty of market abuse under UK law, Sarao’s activity would result in a sentence of 12 months’ imprisonment being imposed on him and so the dual criminality test in section 137 of the Extradition Act 2003 was satisfied. He also stressed the importance of the public interest in upholding the controversial UK-US Extradition Treaty. Sarao is accused of engaging in a ferocious campaign to manipulate the price of the E-mini S&P 500 on the Chicago Mercantile Exchange by relying on a variety of exceptionally large, aggressive and persistent spoofing tactics.
According to the CFTC, between April 2010 and April 2015 he used his layering algorithm on hundreds of trading days. He is accused of distorting the S&P 500, the largest US equity index, which sank by five percent on 6 May 2010 only to rebound 20 minutes later. Sarao’s appeal had been adjourned in September 2015.
As seen on this blog, the Americans have singled Sarao out for his alleged malevolence whereas owing to lack of evidence much bigger fish in the forex rigging scandal seemed to have slipped through the clumsy Serious Fraud Office’s fingers. The extreme nature of retributive justice in his case makes a telling comparison with avaricious individuals such as LIBOR rigger Tom Hayes who managed to dodge extradition and will only serve a few years by way of a custodial sentence. Judge Purdy stressed he was not expressing a view on guilt or innocence, which remained the province of the trial court seised of the evidence in the case, in exercising the extradition jurisdiction.
“Spoofing” is a very clearly articulated offence in US law. Sarao’s lawyers argued that spoofing is not a crime in the UK but the judge did not hesitate to find that the conduct complained of met the dual criminality test and constituted a crime in both jurisdictions. But the dilemma is that it is rather difficult to attribute liability for a crash of this nature to a one-man band like Sarao who operated out of a room in his parents’ house on the outskirts of London.
In Flash Boys: Cracking The Money Code, Wall Street veteran and financial guru Michael Lewis argued that the flash crash occurred “for no obvious reason” and during the extradition proceedings Professor Larry Harris of the University of Southern California gave evidence stressing that the kinds of orders, deemed dodgy by US authorities such as the DoJ and CFTC, placed by Sarao were “not bogus” and Harris – who used to be an economist the Securities and Exchange Commission – was adamant that “they’re real orders”. The academic maintained that it was routine for traders to spend time placing, modifying and cancelling orders in the fashion that Sarao had done.
Unsurprisingly, Sarao has not given up the fight yet and his lawyer Richard Egan said “we think we’ve still got a strong argument” despite the case against his client. Sarao will remain on bail while he challenges the ruling and his appeal is pending. Allegedly, between April 2010 and April 2015, Sarao used his layering algorithm on over 400 trading days and the self-confessed insomniac is accused of profiteering illegally to the tune of £26.7 ($40 million) from trading the S&P E-mini contract and $900,000 on the of the crash. He siphoned the gains off to companies he had incorporated in the Caribbean (one of them traded as “Nav Sarao Milking Markets”) assets worth $40 million belonging to Sarao were seized by the authorities. The 37-year-old trader’s activity led to a 1000-point plunge in the Dow Jones Industrial Average but he denies he did “anything wrong” and blames his predicament for “being good at my job.”
The judge’s findings include that Sarao set up and adapted, with the active assistance of 4 separate programmes, altered software very different from the basic programme and he traded actively on the CME during the period of alleged illegal activity (2009–2014) from his London base. Altering software is not per se illegal either against CME rules or US Federal law and is not uncommon. Indeed, both large and small traders routinely cancel a very high percentage of contracts on the CME (perhaps 99%) and altering contracts is commonplace and legitimate. Sarao profited heavily from his activities and emails sent by him to his various programmers provided a powerful basis for concluding that active market manipulation, including spoofing, was expressly intended and the trader clearly knew it was illegal.
While all of Sarao’s contracts may have been at potential risk of execution, to his fiscal detriment, which is how the market operates, he had adapted his software to minimise the risk way beyond ordinary market custom and practice.
He was seemingly untruthful to regulators in answering formal enquiries as to how he was operating on the CME. Sarao’s expert, Professor Harris, did not undertake any examination of his market activity from any of the data potentially available to him.
On the other hand, the prosecutor’s expert, Professor Terrance Hendershot, formed a view based on an analysis of all that data. The flash crash’s causes are not a single action and cannot on any view be attributed to Sarao. Although he was active on 6 May 2010, it is only a single trading day in over 400 relied upon by the prosecution. Despite disagreeing with the conclusions of US prosecutors, Professor Harris accepted he was not arguing that the complaint of illegal market manipulation is not a genuine belief of both the US prosecution authorities and the US Judge who issued the warrant or the grand jury and its 22-count indictment.
Extradition was challenged on the following grounds (i) that despite being illegal in the US, the spoofing and the market manipulation/conduct complained of involving the adaptation of computer software are not illegal in the UK and so there was no extradition offence because the dual criminality test had not been met under the 2003 Act (ii) the interests of justice per section 83A (forum) warranted trial, if at all, in this jurisdiction barring extradition – even though City regulators and the CPS did not bring charges the court should discharge the request owing to the statutory bar (iii) a human rights challenge was mounted pursuant to section 87 (human rights) that extradition for the alleged conduct would be a disproportionate interference with Sarao’s right to private and family life and (iv) the request was seen to be an abuse of process because, as known to the US authorities, it was constructed upon a materially misleading factual basis.
Trading and Electronic Markets: What Investment Professionals Need to Know – see summary – by Professor Larry Harris was used to explain the CME’s dynamics. It also formed an evidential basis for arguing the point that the Americans were materially misleading the court and were abusing the court’s process. Further to the points observed at the outset, Harris also thought that Greek debt and the activities of a larger trader were to blame for the crash, essentially:
Mr Sarao pegged order submissions strategy did not and could not compel traders to do anything. Anything a trader did in response to Mr Sarao’s orders would be something that that trader decided to do in and of their own volition.
The counter-point was found in the expert evidence tendered on behalf of the US authorities by Professor Hendershot, of the University of California (Berkeley), whose views were reflected in a memorandum sworn by Michael O’Neill a Trial Attorney Fraud section of the US Department of Justice dated 29 November 2015. It is said that an essential element of each of the charged crimes is Sarao’s intent (inter alia); intent to deceive and defraud participants in the E-mini S & P 500; intent to influence the price of E-minis; and intent to cancel E-mini orders before execution (for the spoofing count). Thus, Professor Harris’s assertions are either “irrelevant” or “unsupported” and are “fully capable of resolution at a trial in the United States”. Two factors key to the prosecution’s case are that they dispute the orders were “true” and that Sarao’s activity “did not move the E-market”.
A series of UK offences were relied upon in making the case for dual criminality, namely section 2 (fraud by false representation) of the Fraud Act 2005, section 397 (misleading statements and practices, repealed) of the Financial Services and Markets Act 2000 and its successor found in section 89 (misleading statements) of Financial Services Act 2012. The fact that the latter two offences were unutilised provisions of law did not aid Sarao because the court concurred with the American position that such arguments had no impact to the dual criminality exercise. The lack of prosecutions only exposed the hardships in bringing criminals to justice and that the mere fact that misleading statements were placed on a statutory footing and incurred criminal liability showed that Parliament enacted express powers to stop market manipulation. The US also relied on section 90 (misleading impressions) of the 2012 Act.
The civil case of FCA v Da Vinci Invest Ltd  EWHC 2401 (Ch), in which Sarao placed reliance, did not help him. His team argued that in that case Snowden J held that section 118 of FSMA requires deliberately acting in a way to “give or are likely to give a false or misleading impression” of the “supply of, or demand” of “qualifying investments”. It was argued that these criteria are “much wider” than the alleged conduct. But following Snowden J at para 133, judge Purdy noted that the conduct in question is unlawful in the UK under Code of Market Conduct Rule 1.6.2(4) which stipulates that “entering orders into an electronic trading system, at prices which are higher than the previous offer, and withdrawing them before they are executed, in order to give a misleading impression that there is demand for or supply the qualifying investment at this price”.
Applying Lord Sumption’s approach in Zakrzewski v Poland  UKSC 2, i.e. the abuse jurisdiction is “exceptional”, the judge also went on to hold that: “The challenge is, with respect, a bad one and must factually and legally be rejected.”
Judge Quentin Purdy threw out Sarao’s case on every ground and found that the extradition request was a valid one. Finding against him on section 87/article 8 ECHR, the judge said that in light of the Supreme Court’s decisions in Norris v USA  UKSC 9 and HH v Italy  UKSC 25 as authoritatively revisited by Lord Thomas of Cwmgiedd CJ in Celinski v Poland  EWHC 1274 (Admin):
The law is clear, there is a powerful public interest in honouring extradition treaty agreements with friendly states and thereby seeking to enforce cross border criminal justice and deny safe havens. There is no suggestion the allegations are not of serious fiscal crime.
In light of judge Quentin Purdy’s ruling, which is less elegantly written than some of the case law he cited, Sarao’s case is now being considered by the home secretary Theresa May who has two months to evaluate whether he will be extradited subsequent to which he will have 14 days to appeal to the High Court.
Perhaps Sarao ought to take his cue from Salah Abdeslam, the prime suspect for last November’s terrorist attacks in Paris, who has elected not to resist extradition from Belgium because it is advantageous for his to “explain himself” to the French authorities. People suggested exactly that to Sarao but thus far he has been intransigent to cooperating with the Americans. If extradited, Sarao will be under pressure to plea-bargain with US prosecutors and there will be an incentive for him to plead guilty and not risk 380 years’ imprisonment! But then again, perhaps Sarao should join Julian Assange in the Ecuadorian embassy in London and claim asylum because of American persecution. We can be pretty darn sure that Julian could use the company.
On the first anniversary of the flash crash, the world’s largest asset management firm BlackRock argued that risk can never, and should never, be entirely eliminated from the markets. Instead, greater synergies between market participants and regulators remained the key to preventing another flash crash. In light of such statements it is a bit strange that BlackRock and Vanguard were unhappy that that the Senior Managers Regime should apply to their activities on the basis that they are “asset managers” and not banks, insurers and other financial services firms. The SMR will apply to them from 2018 but they had protested and argued “stop trying to regulate us like banks”.
Anyway, it will be interesting to see if poor Sarao gets a bit of a break at some point because it would be quite insane if his punishment exceeds that of the genocidal Radovan Karadic or the insane jihadis killing people in places such as Brussels, Lahore and elsewhere …