Odds not in favour of UK trader winning US extradition fight
When Navinder Singh Sarao appeared at a London criminal court this week, he told the judge he had “done nothing wrong.” Whether that is true and he is a scapegoat for US authorities seeking someone to blame for the “flash crash” will be most likely for a court in Chicago to decide.
Sarao, 36, accused by US authorities of allegedly playing a role in the 2010 “flash crash,” has become the latest British resident fighting extradition and the prospect of arguing their innocence abroad.
While the issue of extradition has often been contentious between the two countries, British regulators are assisting the US Department of Justice in its investigation and are not seeking to bring a case Sarao in the UK because his trading allegedly affected US markets. The UK Serious Fraud Office also is not at present planning to prosecute him.
“Under the forum bar here, the SFO will have to say we are definitely not going to prosecute,” said one London-based defence lawyer. “That might be one of his options, though, to say `Come on, this really happened here, the case should be heard here.’ Still, I wouldn’t hold out hope. He may have been trading in Hounslow but he was trading futures on the CME. The nature of cross-border cases is that it’s more likely to be a consideration than where he is.”
US authorities say Sarao used a commercially available automated trading system to manipulate the market for S&P 500 futures contracts, called e-minis, on the Chicago Mercantile Exchange, the largest US futures market. He is alleged to have used practices called spoofing and layering, where traders send out orders they intend to cancel but bring them profits by trading around the resultant market moves. He has been charged with wire fraud, commodities fraud and market manipulation over a period of years.
Lawyers say the US authorities will not have to prove that he contributed to the flash crash, only that he broke the law.
“On the flash crash, for me the real issue is the word ‘cause,’” says David McCluskey, a partner at Peters & Peters in London. “It’s kind of like saying the assassination of Archduke Franz Ferdinand caused first world war. You can’t say for sure that without that shot there wouldn’t have been a world war. Or in another universe that war could not have been averted after the trigger was pulled.”
Bart Chilton, a former commissioner at the Commodity Futures Trading Commission, which is investigating the case along with the Chicago Metals Exchange, defended the agency’s decision to target Sarao in a USA Today article earlier this week.
“After detailed analysis (the results contained in a CFTC-SEC joint staff report), it was determined that while there were multiple conditions leading to skittish markets, a single trader had sold an incredible amount ($4.1 billion, 75,000 contracts) at CME in a short time period, thereby tanking Chicago markets and, with simultaneous contagion, devastating New York markets and even impacting other global trading venues,” Mr Chilton wrote.
The joint report references that trade, “but also hundreds of thousands of files, over 25 gigabytes of trading data, along with myriad potential issues and actions contributing to the crash,” he says. “The bottom line is that without the other $4.1 billion trade, the flash crash would not have occurred.”
For Sarao to be successful in fighting extradition, he will have to argue that the market manipulation techniques he is accused of using were not criminal offences in the UK. Lawyers say the method would constitute market manipulation in the UK and that the SFO could also prosecute such behaviour under the Fraud Act, so that argument is not likely to succeed.
In one of the most high-profile examples of extradition from the UK, US authorities targeted a trio that became known as the NatWest Three — the British bankers extradited in 2006 over Enron-related charges after the SFO declined to prosecute them.
The men, David Bermingham, Gary Mulgrew and Giles Darby, spent four years fighting extradition before agreeing to a plea bargain and serving time in a US jail before being transferred to the UK to finish their sentences. All three are out of prison now.
In a more recent case, the UK refused to extradite Gary McKinnon, who hacked Pentagon computers, on the grounds that he had Asperger’s syndrome. Still, that was generally seen as an exception, rather than a new standard in obstructing the US authorities.
An argument based on state of health did not work for Ian Norris, the former chief executive of engineering group Morgan Crucible, a businessman who fought his case up to Britain’s top court in 2009 on the grounds that ill health and advanced age meant he should not be sent to the US to face charges that he covered up a price-fixing cartel. He was convicted by a US jury in 2010.
For Sarao, the future is looking bleak. “Defendants in the UK facing extradition have limited ability to challenge the US, “ says Peter Binning, a defence lawyer at Corker Binning in London.
“He can argue that it’s unfair to be characterising him as the author of the flash crash but he may still have done something wrong, so even if he can only be prosecuted for a fraction of the true value of the spoofing trades, then he still would be subject to extradition because there’s no reason why the US shouldn’t be able to prosecute him,” Mr Binning says.
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