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

28 03 2016

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. Read the rest of this entry »





Benchmark Manipulation and Corporate Crime: Insights on Financial Misconduct

22 03 2016

In the second innings things were different. The reverse swinging old ball meant that the Serious Fraud Office’s openers came back to the pavilion with a duck and those charged with misconduct and put in the dock began to eye up the opportunity of scoring a hat trick. Coupled with the reduction in Hayes’s sentence by the Court of Appeal (Lord Thomas of Cwmgiedd CJ, Sir Brian Leveson PQBD and Gloster LJ, see here) on the ground that he was not in a managerial position and suffered from autism, the fact that Darrell Read, Danny Wilkinson and Colin Goodman, Noel Cryan, Jim Gilmour and Terry Farr were found not guilty of LIBOR manipulation casts doubt over future successful prosecutions in benchmark rigging cases. Hamblen J directed the jury to convict the brokers if they had played a “significant” role in helping him rig LIBOR. Apparently they had not. The Court of Appeal’s refusal to grant Hayes permission to appeal to the Supreme Court may provide limited comfort to the SFO but the acquittal of the above brokers charged in the second “sham” LIBOR trial has reversed the momentum gained by the authorities. The brokers’ exoneration exposes the SFO to the accusation that it has been wildly swinging a sledgehammer to smash a nut. So, having tasted blood after Tom Hayes’s conviction, taking a gung-ho approach to weeding out the City’s “bad apples” seems to have backfired because the clever brokers had simply let Hayes believe whatever he wanted.

According to the brokers, the SFO “didn’t investigate it properly and didn’t listen”. Despite big increases to its funding, claims that the SFO’s director David Green QC has overseen a “string of successes” and that the extension of his contract for two years is a “boon” for justice are proving to be totally without merit. These days it is the SFO which is in the dock and Tom Hayes’s tormented father Nick Hayes used the opportunity to defend his son and said: “Today Tom Hayes stands tall. He refused to testify versus the LIBOR brokers and paid the price … I’m proud of him.” Of course, measured against such poor performance, the fact that the embattled agency wants a top-up of £21.5 million in emergency funds for “blockbuster” probes to bolster its dwindling fortunes amounts to expecting rewards for failure; it is completely unjustified. Read the rest of this entry »





EURIBOR Manipulation: SFO Charges First Individuals

19 11 2015

George Osborne recently compared bad bankers to shoplifters and Mark Carney said that nobody at the Bank of England (BoE) “will be hugging a banker” – despite the crack down some “bad apples” remain. Two days later, on 13 November 2015, the Serious Fraud Office (SFO) issued the first criminal proceedings against 10 individuals accused of manipulating the Euro Interbank Offered Rate (EURIBOR). Deutsche Bank employees Christian Bittar, Achim Kraemer, Andreas Hauschild, Joerg Vogt, Ardalan Gharagozlou, Kai-Uwe Kappauf and Barclays employees Colin Bermingham, Carlo Palombo, Philippe Moryoussef and Sisse Bohart have all been charged with conspiracy to defraud in connection with the SFO’s ongoing investigation – announced on 6 July 2012 – into the manipulation of EURIBOR, the daily reference rate, published by the European Banking Federation, based on the averaged interest rates at which Eurozone banks offer to lend unsecured funds to other banks in the interbank market, or euro wholesale money market. According to the SFO, criminal proceedings will be issued against other individuals in due course and the above defendants will make their first appearance at Westminster Magistrates’ Court on 11 January 2016. On the other side of the Atlantic, in the first US LIBOR trial, on 5 November 2015 a New York jury found former Rabobank employees Anthony Allen (global head of liquidity and finance) and Anthony Conti (a senior trader) guilty of rigging LIBOR and the pair face lengthy jail sentences.

Unlike Tom Hayes and Nav Sarao, Allen and Conti waived extradition to fight charges of conspiracy and wire fraud in America and they maintain their innocence despite having “left a paper trail a mile long”. Both men are British citizens and American prosecutors are adamant that the guilty verdicts are founded on “rock solid evidence”. Rabobank paid £662 million in LIBOR penalties in 2013 of which the Financial Conduct Authority (FCA) imposed £105 million. Both men were convicted in a district court in Manhattan on every count of conspiracy and wire fraud they faced and the outcome is a major triumph for American law enforcement officials in the US Department of Justice which brought charges against the Britons a year after the Dutch bank managed to achieve the $1 billion/£662 million compromise in October 2013 in relation to pending US and European probes. Read the rest of this entry »





The LIBOR Trial: Episode Two

6 10 2015

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 Read the rest of this entry »





Terminated: City Sheriff Shot Down

16 08 2015

The tough talking Martin Wheatley finally decided to resign last month. But it was for the wrong reason, i.e. vanity. He was unhappy about his boss George Osborne’s refusal to renew his contract as head of the Financial Conduct Authority (FCA) in March 2016. Whilst Wheatley does not accept the excesses of his four year stint as City Sheriff, many in financial circles are nonetheless breathing a sigh of relief that his reign of terror is over. A trigger-happy sort of chap, unlike his iconic predecessors (e.g. Howard Davies, Hector Sants etc) whose shoes he just couldn’t fill, Wheatley persistently failed to command the respect of the financial elite. The shot down sheriff will be temporarily replaced by his deputy Tracey McDermott (who will temporarily act as CEO from 12 September 2015) and Andy Haldane (the Bank of England’s Chief Economist) has been tipped as his permanent replacement. Wheatley, who became globally infamous for his fierce crackdown on the cheating that has historically infected financial services, reportedly said that he is disappointed to be leaving his job because he had some unfinished business to settle; apparently, the cure had not fully been delivered. The caped crusader’s legacy has been one of lumbering the banks with fines, authoring the Wheatley Review (which was germane to reforming LIBOR/benchmarks) and co-authoring the equally seminal Fair and Effective Markets Review with the Bank of England and HM Treasury.

Despite having resigned, Wheatley will apparently stay on at the FCA in an advisory role and he will be paid until July 2016 irrespective of his actual exit in January 2016. He received more than £700,000 in compensation last year. His work has been hailed as the blueprint for oversight of financial benchmarks and has come to form the bedrock of the conduct regime. Equally, his tenure had a lot to do with fear and loathing in the City and mischievous individuals in financial services must be hugely tickled that the terminator himself has been terminated. On the other hand, some were of the view, that his systemic efficiency was little more than a lot of huff and puff. For example, on the subject of third party rights the Court of Appeal – see the long read – thought that his FCA failed to follow proper legal channels and truncated procedures when wrongdoing was penalised and regulatory action was taken. As far as Gloster LJ (with whom Longmore and Patten LJJ agreed) could see, the wheels of justice had simply turned too fast and third party rights had suffered as a result: in other words, enforcement had become redolent of the law of the jungle, the judgment is being appealed to the Supreme Court. Read the rest of this entry »





Supreme Court: The Meaning of “Criminal Property” in POCA 2002

2 05 2015

R v GH (Respondent) [2015] UKSC 24, 22 April 2015

The Supreme Court (Lord Neuberger PSC and Lord Kerr, Lord Reed, Lord Hughes and Lord Toulson JJSC) heard this case on appeal from a judgment of the Court of Appeal (Lloyd Jones LJ, Irwin and Green JJ) reported at [2013] EWCA Crim 2237. Unanimously allowing the appeal of the Director of Public Prosecutions (DPP), giving the only judgment Lord Toulson held at para 47 that the “character of the money did change on being paid into the respondent’s accounts.” This case involved fraud which had been perpetrated through the Internet via four “ghost” websites falsely pretending to offer cut-price motor insurance. To execute his plans, B used associates who opened bank accounts for transmitting the proceeds generated by the scam and H was an associate of this nature. A ghost website in the name of AM Insurance was operated from 1 September 2011 to January 2012. Before the site became live online, two bank accounts, in Lloyds Bank and Barclays Bank, were opened by H and B subsequently took control of these accounts and bank cards linked to them. The Supreme Court held that section 328 of the Proceeds of Crime Act 2002 (POCA) does not require property to constitute criminal property before an arrangement came into operation because such a construction is likely have serious potential consequences in relation to banks and other financial institutions.

The public was swindled into paying £417,709 into the Lloyds’ account and £176,434 into the Barclays’ account for insurance cover that did not exist. Charged under section 328(1) – i.e. entering into or becoming concerned in an arrangement which he knew or suspected would facilitate the retention, use or control of criminal property, namely the money received into the accounts, by or on behalf of B – H was tried in the Central Criminal Court. To the jury, the DPP articulated its case on the premise that whilst H may not have known the details of B’s fraud, the circumstances in which the accounts were opened pointed to H’s knowledge (or at least suspicion) that B had some criminal purpose. Yet Recorder Greenberg QC held that no criminal property existed at the point in time H entered into the arrangement and that H therefore had no case to answer. Read the rest of this entry »





Conduct of Persons in Financial Services: Causing a Financial Institution to Fail

25 04 2014

imagesThe Financial Services (Banking Reform) Act 2013 (the Act) is yet another Leviathan statute. The Act is spread out over eight parts encompassing one hundred and forty-eight sections and contains ten schedules. First of all, this wide-ranging legislation implements the recommendations of the Independent Commission on Banking (or ICB, chaired by Sir John Vickers). Equally, it also implements the recommendations of the Parliamentary Commission on Banking Standards (or PCBS, in relation to the LIBOR scandal) which aim to improve culture and standards in the banking sector. Moreover, under section 17, the Act also provides the Bank of England with the new stabilisation “bail-in option” under the Banking Act 2009. See updates here and here.

Independent Commission on Banking

In its final report, the ICB remarked that:

Banks are at the heart of the financial system and hence of the market economy. The opportunity must be seized to establish a much more secure foundation for the UK banking system of the future.

Recommending structural reform of the banking industry, coupled with measures designed to increase the capacity of banks to absorb losses, the ICB’s work focused on cost effective solutions as regards rescuing failing banks. Read the rest of this entry »