Navinder Sarao, the London-based futures trader who in April 2015 was sued by the Commodity Futures Trading Commission and criminally charged with contributing to the May 2010 “Flash Crash,” is closer to being extradited to the United States following a UK court’s decision last week. This is because the UK court found that the offenses for which Mr. Sarao was indicted in the United States – spoofing and engaging in manipulative conduct – would be prosecutable in the United Kingdom, albeit under different laws.
The CFTC charged Mr. Sarao and his trading company, Nav Sarao Futures Limited PLC, with engaging in spoofing involving E-mini S&P futures contracts traded on the Chicago Mercantile Exchange for the purpose of disrupting the market in order to facilitate related trading that netted him profits in excess of US $40 million. The alleged wrongful trading occurred between April 2010 and April 2015. In addition, the two defendants were charged with manipulation, attempted manipulation, and employing manipulative or deceptive devices or contrivances.
Mr. Sarao was also accused of wire and commodities fraud, spoofing, manipulation, and attempted manipulation in a criminal complaint in connection with the same activity. This action was filed in a US federal court in Chicago by the Department of Justice. The United States sought Mr. Sarao’s extradition in connection with this latter action.
Although the Hon. Quentin Purdy, the judge hearing Mr. Sarao’s case in the United Kingdom, made clear he was not evaluating the case on the merits to assess guilt or innocence, he did make certain findings in evaluating the extradition request. Among other matters, the judge concluded that
[e]mails sent by Navinder Sarao to his various programmers provide a powerful basis for concluding, absent any contradiction, that active market manipulation, including that known as spoofing, was expressly intended and was clearly known by him to be illegal.
Moreover, claimed the judge,
[w]hile all of Navinder Sarao’s contracts may have been at potential risk of execution, to his fiscal detriment, which is how the market operates, Navinder Sarao had adapted his software to minimise the risk way beyond ordinary market custom and practice.
However, the judge disputed allegations that Mr. Sarao “wholly or mostly” precipitated the May 5, 2010 “Flash Crash.” (The “Flash Crash” refers to events on May 6, 2010, when major US-equities indices in the futures and securities markets suddenly declined 5-6 percent in the afternoon in a few minutes before recovering within a similar short time period.)
The final decision on Mr. Sarao’s extradition will now be made by the UK Secretary of State who has two months to consider the DOJ’s request following the court’s ruling. Public reports indicate that Mr. Sarao will appeal the court’s decision (click here, for an example, in the article, “Court rejects flash Crash trader Sarao’s extradition challenge" in the March 23, 2016 edition of The Telegraph).
(Click here to access a detailed description of the CFTC’s and DOJ’s case against Mr. Sarao in the article, “London-Based Futures Trader Arrested, Sued by CFTC and Criminally Charged With Contributing to the May 2010 'Flash Crash' Through Spoofing” in the April 22, 2015 edition ofBetween Bridges.)
Legal Weeds: Although not relevant in Mr. Sarao’s extradition hearing, the CFTC’s enforcement action against the trader is notable for the breadth of its legal theories. In its complaint, the CFTC charged Mr. Sarao with violating prohibitions against manipulation, attempted manipulation, disruptive trading (spoofing) and employing manipulative devices or contrivances. The criminal case against Mr. Sarao does not include charges of employing manipulative devices or contrivances, but instead additionally accused him of engaging in wire and commodities fraud. Unlike the alleged spoofing at issue by Michael Coscia, who recently was convicted of spoofing by a jury in Chicago, Mr. Sarao’s alleged wrongful conduct, claimed the CFTC, at least sometimes involved him repeatedly entering and rapidly cancelling a series of four to six large size sell orders in order to try to drive market prices down after previously selling an order, on the same side of the market, close to the market’s peak. When the market price subsequently collapsed, Mr. Sarao would offset his short position through a buy order at a lower price, alleged the CFTC, thereby profiting. Mr. Sarao would allegedly later further profit by buying at the lower price, and selling at a higher price after the market recovered. (Click here for details in the CFTC's complaint against Mr. Sarao at paragraph 54.) Mr. Coscia was charged with typically layering on one side of the market with large orders in order to influence market prices and then executing a small lot order on the opposite side of the market. Mr. Coscia would then purportedly reverse his trading process to liquidate his position in order to profit. (Click here to access background on Mr. Coscia’s conviction and the charges against him in the article, “Jury Convicts Michael Coscia of Commodities Fraud and Spoofing” in the November 8, 2015 edition of Bridging the Week.)