Navinder Sarao: ‘Flash Crash’ Trader’s Extradition Request Upheld

The Government of the United States of America v Navinder Singh Sarao (23 March 2016)

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.

The LIBOR Trial: Episode Two

The SFO lost this case: see here, original post continues. Only recently former rogue UBS trader Tom Hayes, who accused the Swiss lender of distributing a manual on rigging LIBOR, became the first person ever to be convicted of benchmark rigging. He got 14 years’ imprisonment for eight counts of fraud and is appealing his conviction and sentence. However, episode two of the LIBOR trial is underway in London this week and a number of brokers thought to be acting in cahoots with Hayes are facing a jury in Southwark crown court for manipulating the interbank rate. These proceedings constitute a continuation of the long promised clean up (being overseen by the Serious Fraud Office) of rampant cheating in the banking and financial services industry that erupted in the aftermath of the global financial crisis. The sequel proceedings involve a batch of allegedly crooked individuals, namely Darrell Read (50), Colin Goodman (53), Danny Wilkinson (48) of ICAP (“a leading markets operator and provider of post trade risk mitigation and information services”); Terry Farr (44) and James Gilmour (50), formerly of RP Martin; and Noel Cryan (49, of Tullet Prebon). Their criminal trial began today and is expected to last 12 to 14 weeks and is likely to end early in the new year. All six men deny the charges and have elected to plead not guilty.

The new/emergent point in these cases is the part played by brokers, and not traders and submitters, in LIBOR manipulation. The half a dozen individuals identified above stand accused of conspiring with Hayes to rig LIBOR by suggesting numbers which were falsified and misleading. Darrell Read and Colin Goodman are said to have conspired with Brent Davies (also of ICAP) and Hayes. Terry Farr and James Gilmour are said to have conspired with Luke Madden of HSBC and Paul Robson of Rabobank to rig LIBOR. Farr also faces charges for conspiring with Hayes during his time at Citibank (which ultimately reported him over his cheating ways). Noel Cryan is accused of conspiring with UBS traders. Mr Justice Hamblen, a highly accomplished and respected judicial figure, will hear the case and it is being prosecuted by Mukul Chawla QC who saw to it that no loose boards were left dangling from Hayes’s coffin when he went down. Opening the case for the prosecution, Mukul Chawla QC argued that all six defendants conspired with Hayes and others and that

Tom Hayes: Trial By Fire

As ever, the world of finance is abuzz with sizzling news. Most of it, like the judgment in Plevin [2014] UKSC 61, makes pretty grim reading for banks. Similarly, forex fixing claims worth billions are brewing in London – a colossal currency market – because of last week’s $2 billion payout in New York by household names such as Barclays, HSBC and RBS and numerous others: indeed, the settlement of class action litigation with investors, arising out of the rigging of WM/Reuters 4pm London Fix, has been tipped as opening the floodgates. This comes off the heels of May 2015’s foreign exchange (forex or FX) rigging penalties of $5.6 billion: watch excellent video on how the “Cartel” and “Coiled Cobra” rigged the marketplace. Such events leave little room for doubt that the LIBOR scandal was just the tip of the iceberg because the rigging of the $5.3 trillion-a-day forex markets completely dwarfs the total $500-$800 trillion value of financial contracts underpinned by LIBOR. Citigroup, JPMorgan Chase & Co, Barclays and RBS all pleaded guilty in May in forex related criminal cases. In other news, things are looking dreadful for those charged by the Serious Fraud Office (SFO). In the first LIBOR trial, Tom Hayes, an obscure yen derivatives trader in UBS and Citigroup became the world’s first individual to be tried and convicted for benchmark rigging. He got 14 years’ imprisonment for his crimes. Against this nightmare sentence, his trial has set a chilling precedent for the 12 others in his shoes who are awaiting trial.

Hayes contended that he was operating in a “grey area” where there were “no rules” and that he had no compliance training, but this did nothing to help him. His predicament gives promise to the maxim that “the age of irresponsibility is over.” In the case against him, Hayes was described as a “ringmaster” whose avarice knew no bounds. The archetypical Foucauldian fiend, he stood accused of using corruption and accepted making “concerted efforts to influence LIBOR” but argued he “was operating within a system”. Discussing the dilemma’s associated with punishment, in Discipline and Punish: The Birth of the Prison Foucault concludes that the offender is “worse than an enemy” and that transgressing the boundaries set by society makes him “nothing less than a traitor, a monster.” The outcome of this pivotal case will serve as a yardstick for future prosecutions against benchmark manipulators and fraudsters. The system had to make an example of Hayes to create a deterrent effect, others will think twice before following in his wretched footsteps.

Hunter into Prey: City Watchdog Exposes its Achilles’ Heel – Part 2

The issues in the last post must be examined in light of the scandal which erupted in late 2014 when the FCA came under heavy fire from the Davis Report because of the highly irresponsible way in which it had leaked sensitive data to the media earlier in March that year. Simon Davis, a partner in the Magic Circle firm Clifford Chance, stressed that there had been nothing less than systemic failure. Davis was adamant that the FCA failed to address the issue of whether the information given out might be price sensitive. The conclusion was unsurprising because the leak culminated in an article in the Telegraph headlined Savers locked into ‘rip-off’ pensions and investments may be free to exit, regulators will say which claimed that the regulator was planning an investigation of 30 million pension policies, some sold as far back as the 1970s. Consequently, big insurance companies had billions wiped off their share prices. The misapprehension that selected annuity products would be picked out meant that major UK insurers saw their share prices plummet. The insurers called for Wheatley’s resignation. Even the Chancellor George Osborne bemoaned he was “profoundly concerned” by the episode. In his inquiry, Davis unearthed multiple failures symbolic of a dysfunctional organisation, and he emphasised that the regulator was “high-risk, poorly supervised and inadequately controlled.”

Davis – who was unsparing in his criticism – held the FCA’s Board responsible for the flaws in the regulator’s controls on the identification, control and release of price sensitive information. The buck ultimately stopped with the board because it “failed in its oversight of the FCA’s executive and … failed to identify the risks inherent in the FCA’s communications strategy.” The episode required urgent action and an external organisation needed to review the board’s practices and effectiveness. So serious were the mechanical failures of corporate governance of the City watchdog. To scotch the confusion, in light of public hearings that ensued, on 17 March 2015 the House of Commons Treasury Select Committee (the Treasury Committee) published Thirteenth Report (2014-2015): Press briefing of information in the Financial Conduct Authority’s 2014/15 Business Plan (HC881).