Flash Crash Trader May Fly to U.S. Sooner Than He Thinks

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How 'Spoofing' Might Have Crashed the Market

If history is any guide, it probably won’t be long before a British man accused of helping cause the 2010 flash crash is delivered to U.S. prosecutors. The task then turns to proving the Americans’ case against him.

Navinder Singh Sarao, 36, told a London court on Wednesday he’ll fight extradition to the U.S., where he faces 22 criminal charges including fraud and market manipulation. Prosecutors claim he made as much as $900,000 from trades as markets plunged on May 6, 2010, and more than $40 million over the next four years.

“Extradition to the U.S. is more or less inevitable unless you have serious health problems,” said Andrew Smith, a London lawyer who specializes in white collar-crime cases. Fighting the process can damage your chances of getting bail or negotiating a deal in the U.S., he said.

Eric Sussman, a former federal prosecutor in Chicago where Sarao would have to answer the charges, agreed.

“The U.S. has a pretty good extradition treaty with the U.K.,” he said.

Sarao’s one-man trading operation, which he ran out of a house by Heathrow airport in West London, used automated software to manipulate markets, according to the U.S. Justice Department and the Commodity Futures Trading Commission. He was responsible for one in five sell orders during the flash crash, when nearly $1 trillion of value was erased from U.S. stocks in minutes, prosecutors say.

Bail Ruling

The trader was granted bail of 5 million pounds ($7.5 million) by a London judge Wednesday, told to sleep at his parents’ house and stay off the Internet. Sarao’s lawyer declined to comment after the hearing.

Should the U.S. win the extradition fight, the prosecution will pivot to proving the case.

“The biggest thing is going to be intent,” said Sussman, the former prosecutor who is now in private practice at Paul Hastings LLP. “They’re going to have to, in essence, prove the reason he was making these trades was to fool the market.”

It’s not hard to see why he’d oppose going to the U.S. If convicted on all counts, he could face a 380-year jail sentence.

Martin-Artajo

Extradition cases aren’t necessarily a sure thing. A Spanish court Thursday rejected a request to send Javier Martin-Artajo, the former JPMorgan Chase & Co. banker accused of helping hide the London Whale’s trading losses surpassing $6.2 billion, to face trial in the U.S.

The court turned down the demand because Martin-Artajo is a Spanish citizen and the events occurred outside the U.S., the ruling shows.

All the same, American prosecutors normally get their way when they pursue suspects in the U.K.

Between 2004 and 2011, the U.S. made 130 extradition requests to the U.K, according to a 2011 report to the British Parliament. Only seven of those were thrown out by the courts and none were refused by the U.K. government.

A British hacker who got into the U.S. military computer system defeated an extradition bid in 2012 because of serious mental illness. The so-called Natwest 3 bankers argued their case should have been brought in the U.K. and ultimately delayed extradition by three years before being sent to Houston in 2006 to face Enron Corp.-related fraud charges.

High Bar

“The bar against extradition to the United States is set very high,” said Jasvinder Nakhwal, chair of the U.K. Extradition Lawyers Association. “There is a basic expectation that the U.S. authorities operate within the rule of law.”

There could still be legal arguments, about human rights or health issues, which may delay the process, Nakhwal said.

American prosecutors need only to show their British counterparts an affidavit establishing probable cause Sarao committed the crime. The charges unsealed this week in Chicago, which were accompanied by the statement of a Federal Bureau of Investigation agent, may be enough, Sussman said.

That Sarao, like Martin-Artajo, was outside the U.S. when he made his trades will be of little help to the U.K. citizen in fending off extradition, said Nina Marino, a criminal defense attorney with Kaplan Marino PC in Beverly Hills, California.

“The fact that his actions affected the market here is likely a sufficient nexus for jurisdiction,” she said.

Online Petition

The odds facing Sarao have started to win him some supporters. An online petition on the Change.org website asked Prime Minister David Cameron to block the extradition.

“One man with a single broadband connection can not bring down an entire stock market o[n] his own,” wrote its creator, William McCarron. The petition had 60 supporters at 11:30 a.m. Thursday in London.

Nick Leeson, a broker whose trading losses brought down Barings Plc and who served three-and-a-half years in a Singapore prison, also said he sympathizes with Sarao.

“Remember waiting for extradition hearings myself,” he wrote in a Twitter post. “Definitely the scariest, most debilitating, depressing period of my whole saga.”

Sarao is just the second person accused of engaging in the criminal market manipulation tactic known as spoofing. The other federal case, against Panther Energy Trading LLC principal Michael Coscia is also pending in Chicago, where he has entered a plea of not guilty.

Spoofing Statute

A U.S. judge there last week rejected Coscia’s argument that the spoofing statute, which requires an intent to place market orders with the intention of canceling it, is too vague, because it could cover legitimate activity too.

Coscia’s computer-programmed buy/sell orders couldn’t be executed, according to the federal indictment, said Clifford Histed, a former federal prosecutor and attorney with the U.S. Commodity Futures Trading Commission. He called that “good evidence” of Coscia’s intentions.

Sarao rejected accusations he’d done something similar, according the U.S. complaint, Histed said.

“I DO NOT use ANY computer program that minimizes or reduces the chan[c]e of my trades being filled,” Sarao allegedly said in an e-mail to a futures commission merchant.

His orders “could have been hit at least for some brief period of time,” Histed said. If Sarao was indeed canceling them manually, “that could be a defense,” the former prosecutor said.

The cases are U.S. v. Sarao, 15-cr-00075, and U.S. v. Coscia, 14-cr-00551, U.S. District Court, Northern District of Illinois (Chicago).

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