Flash Crash

by Liam Vaughan

  Over the course of that summer, Garcia came to London to see Nav and IXE’s half dozen or so other British investors at IXE’s newly rented offices, which overlooked the Royal Exchange, where the Liffe pits once roared. Exchange Alley (since renamed ‘Change Alley’), the swindler’s paradise Defoe described, was a hundred metres away. Garcia told the investors that, because Morgan Stanley was selling its Swiss unit and the acquirer had no interest in the trade finance space, it was going to be necessary for them to transfer their funds to Arner. This time, though, he explained, the deal would be structured slightly differently. Rather than everyone having their own individual accounts, all the money, around $90 million, would be consolidated into a single account in the name of ‘IXE Trading AG’, which would distribute the returns. Also, instead of simply being used as a ‘backstop’ for the ‘riskless’ trades of third parties, the funds would also now be utilised to make ‘direct’ investments into agricultural markets. Garcia assured participants their money would be as secure as ever and presented them with a stark choice: anyone who transferred the money would receive even more interest. Those who didn’t could no longer participate at all.

  For three years, IXE’s investors and their introducers had received their payments every quarter without fail. Against a backdrop of rock-bottom interest rates and pitiful returns, they’d seen their wealth climb and climb. Back in 2012, when Hinduja Bank was hit with sanctions, they’d transferred their money to Morgan Stanley with no problems. So when Garcia told them they needed to move the money again, nobody blinked. Nav filled out the paperwork agreeing to transfer his $65 million to Arner Bank in September. After finding out he could add yet more millions to the pile he had been assiduously building since the first day he placed a trade, he didn’t hesitate for a microsecond.

  In little more than a decade, Nav had gone from a standing start to the point where signing off on such multimillion-dollar deals seemed perfectly reasonable to him. He’d forged his own path to get there, eschewing the traditional routes to success in the financial world, and still bringing in the kinds of numbers that the highest earning big-bank traders and hedge fund managers a few miles away in the City of London aspired to. But the intensity of his focus and the strength of his obsession had rendered Nav blind to virtually everything else, including the perils that now swirled all around him. It was only a few weeks later, when he was abruptly awoken by the sound of his father’s voice telling him the police were on the doorstep, that the reverie was finally broken.

  ACT THREE

  CHAPTER 21

  WHERE’S THE MONEY, NAV?

  When the US government finally descended on Hounslow to arrest Nav on 21 April 2015, one of his overriding emotions, he would later tell investigators, was relief. Twelve years had passed since he’d arrived at Futex with not much more than the money in his pocket, boasting about how he was going to make a billion pounds. No one could accuse him of not giving it a good go, but lately, the pressures he was facing were weighing him down: the regulators’ letters; the ceaseless demands of his business associates; the six-figure losses that seemed to come more frequently now. Nav was adamant he’d done nothing wrong, but he’d grown morose, that steel-box mind, normally so resistant to unnecessary feeling, buckling under the strain. As he was driven from his parents’ house, handcuffed, in the back of an unmarked police car, he could at least console himself in the knowledge that, no matter what came next, the running was over.

  After a night in the cells, Nav was taken to Westminster Magistrates’ Court, a modern, clinical building in an otherwise touristy stretch of north London between Baker Street and Edgware Road. The story of how a young British trader came to be blamed by the American government for helping cause a trillion-dollar market crash from his childhood bedroom had dominated the news cycle, and by 9.30 a.m. a queue had formed outside Court One. When the clerk unlocked the doors, reporters hurried to the forty or so seats in the gallery at the back. Seated among them, in a beige jacket and a baseball cap pulled low over his eyes, was Nachhattar Sarao, Nav’s father. Shortly after 10 a.m. the judge motioned for a guard to fetch the defendant. The room fell silent as Nav shuffled into the dock, his fading canary-yellow sweatshirt providing a rare splash of colour. Slumped behind a reinforced glass wall, he looked as fragile as a bird.

  Nav listened to the charges, rejected the DOJ’s extradition request and confirmed his personal details so quietly the judge had to tell him to speak up. He was represented by a solicitor named Richard Egan whose firm, Tuckers, had chanced into the assignment by being the next name on the duty roster. In the afternoon, the parties agreed on a date for the extradition hearing in mid-August, four months hence. ‘I suspect the last twenty-four hours or less have been somewhat traumatic for you,’ said the judge, before granting Nav bail on the condition he stay off the Internet, report to a police station three times a week, and hand over £5.05 million – everything in his R. J. O’Brien trading account plus £50,000 surety from his parents – to deter him from fleeing. As soon as the money arrived, he would be allowed to go home.

  News of Nav’s arrest had spread quickly among those who knew him. Lynn Adamson was at home listening to Radio 4. Miles MacKinnon got a call from a journalist as he was boarding a train. In Chicago, Jitesh Thakkar was forwarded an article by a friend who recognised Sarao’s name. Futex alumni shared anecdotes on WhatsApp, and a Bloomberg Television crew travelled to Woking to interview Paolo Rossi on the trading floor where Nav cut his teeth. ‘Nav was always going to be the kind of person that I believed would be legendary, potentially legendary in some way,’ said Rossi. (CVs flooded into Futex for days.) For their part, Wible, O’Neill and the FBI agents avoided the glare of the courtroom, flying back to the United States after a night out with the team from Scotland Yard.

  While Nav waited to be released, he was held in Wandsworth Prison, a vast Dickensian fortress south of the Thames. He expected to be there a matter of hours, but the following day one of the solicitors visited to explain there was a snag. Before Nav was arrested, the CFTC had secured a freezing order on his assets, prohibiting US broker R. J. O’Brien from releasing his funds and requesting any non-US entities to do the same. Tuckers was working to resolve the situation, the solicitor said, but for now, Nav would remain incarcerated. Wandsworth houses roughly 1,700 inmates across eight wings, ranging from serial shoplifters to violent sexual offenders. Many, like Nav, are in a kind of limbo, either on remand or waiting to be moved on to another jail. Built in 1851, its foreboding grey stone facade was featured in A Clockwork Orange. In 1965, the train robber Ronnie Biggs escaped from the yard. Nav’s cell, where he was locked up for twenty-three hours a day, was six by ten feet and contained a toilet, a bunk with a plastic sheet, and a barred window. Highly sensitive to light and noise and unsure how long he’d be there, he found it impossible to sleep. After a week, he was taken back to court in a grey, prison-issue tracksuit, where a judge declined a request to alter the terms of his bail. When the same thing happened a week later, he shouted towards the gallery as he was led away: ‘What am I in jail for? I didn’t do anything wrong apart from being good at my job!’ It was the five-year anniversary of the Flash Crash.

  In early May, Nav was taken to a prison meeting room, where he was greeted by Roger Burlingame, a former high-ranking DOJ prosecutor turned defence attorney who’d carved a niche in London representing European targets of US criminal investigations. Burlingame, who was forty-five and had a low-key, disarming manner, was a partner at Kobre & Kim and had been drafted in by the British lawyers to deal with the US side of the defence. His first job was to get Nav out of jail. The problem, he explained, was that the American government considered Sarao a flight risk. Nav had no ties to the US and, according to the CFTC’s calculations, had made $40 million trading the e-mini since 2009 alone, most of which was sitting offshore and out of their grasp. If the money was unfrozen and he was released, what was to stop him from disappearing? Other than emulating Ronnie Biggs, Nav h
ad three possible routes out of Wandsworth: convince the CFTC to unblock his assets, persuade the British judge to lower the bail, or come up with the £5 million from somewhere else.

  Before settling on a course of action, Burlingame needed a better understanding of Nav’s finances. He listened while his client described a sprawling empire that stretched from the Isle of Man to Switzerland to the Cayman Islands, and included investments in renewable energy, gambling, trade finance and insurance. Once he’d gleaned everything he could, the lawyer began contacting Nav’s associates, who told him that all the money set aside for the wind venture was stuck in a bank account they couldn’t access; that Iconic, the online gambling company in which Nav owned a stake, was haemorrhaging money so fast it had borrowed an additional £1 million from Nav a few weeks before the arrest; and that, while there was some cash sitting in IGC, Nav’s offshore corporation, liquidating it abruptly would spark a tax bill in excess of $30 million. The only chance of getting funds quickly, then, was IXE, which, according to the statements it produced, now held around $65 million of Nav’s money at the Swiss bank Arner.

  When Garcia eventually called Nav’s lawyers back, he said he was sorry to hear about Nav’s predicament, but there wasn’t much he could do. Nav’s funds were subject to strict lock-up clauses, the earliest of which expired in January 2016. What’s more, even though the CFTC’s freezing order was for all intents and purposes unenforceable outside the United States, IXE’s directors had taken the decision not to make any payments to Nav or his introducers until the situation was resolved. Eventually, Garcia said he thought it might be possible to release a chunk of Nav’s cash a bit earlier, in November. But that was six months away, and Nav’s lawyers were starting to worry he might not survive that long.

  After eight weeks in Wandsworth, Nav was unravelling. Severely sleep-deprived, he’d taken to draping his blanket over the window to try to block out the light, but the cacophony of prison life was incessant and terrifying. A few days earlier, another inmate had been moved in. Their bunks, divided by a plastic screen, lay less than two metres apart. When his new cellmate tried to hang himself, Nav held up his thrashing legs until a guard arrived. Outside on the wing, the atmosphere was feral. Inmates smoked drugs until they passed out and protested at their treatment by flinging faeces. Nav’s only reprieve was the weekly bail hearing at Westminster, which always ended in crushing disappointment. To occupy himself, he read philosophy books. One of his favourites was The Celestine Prophecy by James Redfield, a kind of modern-day fable in which the protagonist embarks on a perilous journey to Peru, where he learns important life lessons, such as the futility of accumulating material wealth.

  Across the river, back at the courthouse, the battle for Nav’s release was escalating. By now, it was clear that there were no liquid funds to pay bail, so the focus turned to persuading the British judiciary to show mercy. To handle the forthcoming extradition hearing, Tuckers had appointed an eminent barrister named James Lewis who, on 20 May, took the matter to the High Court. Lewis asked that the bond be cut to just his parents’ £50,000, arguing that Nav was from a ‘tight-knit family’ and would never do anything to jeopardise what amounted to their life savings. The judge was unmoved, saying £50,000 was ‘no assurance at all’ on profits of $40 million, particularly since Nav had no partner or children. All the confusion around Nav’s finances brought to the fore another delicate issue. By now there were half a dozen lawyers working on various aspects of the case. If the money was tied up or worse, how were they going to get paid?

  The defence team hired a psychiatrist who, after meeting with Nav, determined he scored highly on the scale for Asperger’s syndrome, a condition on the autism spectrum marked by social difficulties, obsessive interests and a heightened sensitivity to stimuli. Nav had never visited a psychiatrist before, and, although he’d spent his life being told he was odd or weird, it was the first time anyone had suggested he had a specific condition. A 2015 study by the University of Cambridge found autistic traits, such as attention to detail and difficulty taking another person’s point of view, are more common among those working in mathematics and science-based professions.

  The CFTC’s restraining order was due to expire in June, at which point there would be an injunction hearing where a judge would decide whether to extend the freeze until the case was wrapped up. Aware that could potentially lock up Nav’s funds for years, Burlingame called the CFTC to try to hammer out a deal. The agency’s priority was restitution. Nav had accumulated tens of millions of dollars, and the regulators wanted to make sure that, if he was found guilty, he paid back every cent of it that came from cheating the market. After listening to their concerns, Burlingame made a novel proposal. Chasing foreign assets is a frustrating, arduous process, but Kobre & Kim had some expertise in the field. If the CFTC agreed to modify its restraining order to unblock Sarao’s global assets, the firm would act as a kind of bounty hunter, tracking down the loot on the government’s behalf and placing it in an escrow account. The first deposit would be the £5 million at R. J. O’Brien. Of the money Burlingame and his team retrieved after that, $2.5 million would be set aside for legal fees plus whatever was required for bail. If the total pot reached more than $30 million, the excess funds would be used to cover any additional fees as well as Nav’s living expenses. The CFTC agreed, and on 29 June the restraining order was amended.

  Nav’s prospects of release may have improved, but his business empire continued to disintegrate. Iconic Worldwide Gaming, into which he’d now plaoghed $5 million, was supposed to go live later in the year, but the project was behind schedule, and when the payment processing company heard about the controversy surrounding Nav, one of its chief investors walked away. Members of Iconic’s board quickly followed. By now, Damien O’Brien, its ponytailed founder, had already commissioned a sixty-second action-movie-style advertisement starring mixed martial arts superstar Conor McGregor, and was preparing for a splashy launch at the MGM Grand in Las Vegas at McGregor’s next fight. A month after the bout, the company was placed into liquidation.

  ‘Iconic was a business with great potential, but after the arrest it all fell apart,’ says O’Brien. ‘Partners, banks and executives walked away. I did everything to keep it afloat, but no one wanted to be associated with the guy blamed for causing the Flash Crash. I personally lost around twenty million dollars. But I liked Nav and I wish him all the best.’

  Meanwhile, IXE decided it was now going to halt all outgoings, which had a devastating impact on those who had come to rely on the money. Lynn Adamson and her partner were bombarded with calls from angry investors and introducers who couldn’t understand what Sarao’s legal problems had to do with them. Cranwood, the wind project, was shuttered before a single turbine had been erected. An increasingly desperate MacKinnon and Dupont hired lawyers to try to force Garcia to release some funds, and reluctantly handed back the keys to the office in Berkeley Square. For five years, they had clung to Nav’s coattails and been rewarded with money and success. Now they were tarnished by association.

  Nav was finally released on 14 August 2015. The judge agreed to cut bail to £50,000 because still none of the assets had been retrieved. In a few weeks, he’d be back for the extradition battle. Until then, he was a free man, provided he remain within London’s M25 ring road and wear an electronic tag. It was a drizzly afternoon, and photographers jostled to capture the infamous Hound of Hounslow as he made his way to a taxi, his hair grown long under the pointed hood of a black coat pulled, wizard-like, over his head.

  CHAPTER 22

  # FREENAV

  No sooner had Nav’s arrest been made public than the backlash began. The antipathy towards high-frequency trading was at its post-Flash Boys zenith, and every element of Sarao’s story, from his humble beginnings to his criticism of HFT to the heavy press of the American government to the outlandish nature of the allegations, seemed precision-tooled to provoke a sense of indignation. Before the details of the complaint
had been absorbed, commentators had lined up behind the underdog. ‘The simple idea that a chap in West London, playing around at home with an off-the-shelf algo programme on his PC while his parents are off at the gurdwara, can up-end the entire US equity market is comical,’ wrote one Financial Times journalist, adding that ‘you know, instinctively,’ the case is ‘nonsense’. A few days later, the New York Times published an op-ed titled ‘The Trader as Scapegoat’ by Columbia professor Rajiv Sethi, who suggested Sarao’s tactics were understandable, even laudable, in a world dominated by front-running algos. ‘If regulators and prosecutors are serious about enforcement of securities laws, they should focus on the largest players in the fragmented markets for stocks and not on an individual, acting alone, who managed to fool an algorithm,’ he wrote. In Bloomberg, Michael Lewis questioned why it had taken the regulators five years to bring charges.