'Flash crash' trader pleads guilty to $40m fraud

Navinder Singh Sarao made millions from a bedroom in his parents' house in west London

Trader Navinder Singh Sarao arrives at Westminster Magistrates' Court, London, where a full extradition hearing is to take place for the British financial trader who is accused of helping trigger a multimillion-dollar US stock market crash (PA)

Navinder Singh Sarao, the British day trader accused of contributing to the 2010 Flash Crash, was allowed to return to his parents’ home near London’s Heathrow Airport after becoming the second person convicted of manipulating commodities markets by placing orders he never intended to fulfill.

Mr Sarao, 37, extradited from the UK two days ago, pleaded guilty to spoofing and wire fraud in a Chicago federal court and agreed to forfeit $12.9 million in ill-earned gains from his trades. He was accused of making $40 million spoofing the Chicago Mercantile Exchange’s stock futures market over five years, including on May 6, 2010, when a trading frenzy briefly wiped almost $1 trillion from the value of American equities.

He was accused of making $40 million spoofing the Chicago Mercantile Exchange’s stock futures market over five years, including on May 6, 2010, when a trading frenzy briefly wiped almost $1 trillion from the value of American equities.

His case grabbed headlines around the world as people struggled with the idea that a single day trader – often working from his bedroom in the house he shared with his parents – could make so much money and wreak such havoc on markets.

Mr Sarao’s plea came a year after trader Michael Coscia was convicted of spoofing and commodities fraud by a Chicago jury in the first criminal trial since such activity was made illegal. In the same court, the Commodity Futures Trading Commission reached a settlement in October in its lawsuit accusing Igor Oystacher and his 3Red Trading of spoofing, a form of manipulation that involves moving prices by placing orders without intending to execute them.

Mr Sarao also agreed to pay a penalty of $25.7 million to the CFTC to resolve a 2015 civil lawsuit filed against him by the commission. That settlement, which must be approved by a judge, bans Sarao from trading derivatives.

He faces a prison sentence of as much as 30 years. In reality, that maximum sentence is more an indication of the severity of the alleged crimes than the actual sentence he might receive.

Dressed in an orange prison jumpsuit with his ankles chained, Mr Sarao stood in court on Wednesday with his hands behind his back, responding softly “yes, your honor” when asked whether he understood the terms of his plea agreement and release.

He told US District Judge Virginia Kendall he had a degree in mathematics and computer science. When the judge asked whether he had been treated for a mental illness, his lawyer, Roger Burlingame, said Mr Sarao has “severe Aspergers” but hasn’t been treated for it. While Mr Sarao has “very limited functionality” and lacks social skills, he has extraordinary abilities, including pattern recognition, Mr Burlingame said.

Judge Kendall approved Mr Sarao’s release before sentencing under a plea agreement with prosecutors after confirming the process for placing liens on the property of his parents and brother in the UK The judge called Mr Sarao’s father to make sure he understood that his home was being used to secure the $750,000 bond for release.

Mr Sarao will be under curfew from 11 pm to 4 am and will be barred from travelling outside the UK or drinking excessively. “He doesn’t take any sort of intoxicant at all,” Mr Sarao’s father said. “He doesn’t even drink tea or coffee.”

The judge set a status conference for 9 February to decide on a sentencing date.

While fighting extradition, Mr Sarao spent four months in prison last year as he tried to secure bail, eventually winning his release in the UK by disclosing he had about £25 million of assets in Switzerland.

US prosecutors said Mr Sarao manipulated one of the most important financial assets in the world – futures on the S&P 500 Index, the benchmark measure for US stock prices.

The case shone a light on spoofing, a form of cheating made illegal through the 2010 Dodd-Frank Act. The technique is frowned upon because it undermines the validity of price quotes. Spoofing involves placing orders to buy or sell with the intent of moving prices in one direction, then canceling those trades before they’re executed to profit when prices snap back to where they had been.

Mr Sarao’s lawyers challenged the US case by arguing in October that his actions weren’t a crime in the UK, and, because he is a British citizen, that any trial should take place in England. The prosecution countered that while Mr Sarao was in the UK, most of the damage was on an American trading platform.

“Navinder Sarao abused sophisticated technology to make a quick profit, and jeopardised the integrity of US financial markets,” US Assistant Attorney General Leslie Caldwell said in an emailed statement. “By flooding the marketplace with bogus orders, his scheme victimised countless individuals.”

Bloomberg