by Liam Vaughan
As Brand Eins was preparing to publish its exposé, the Wall Street Journal ran a piece reporting that IXE’s acquisition of Arner Bank had fallen through amid ‘finger-wagging and confusion’. Garcia was quoted claiming he got cold feet after discovering the true extent of the bank’s problems, but internal correspondence cited by the Journal indicated he’d been unwilling or unable to come up with the $28 million in capital required by the regulator or produce the necessary documentation, including his tax returns. The bank’s owners had been left out of pocket after funding Garcia’s expenses during the protracted courtship. Michael Baer, the storied banker drafted in as chairman, walked away bemused and embarrassed. ‘Businesses that need money often don’t look hard enough at potential partners, a mistake that can be expensive and damage their reputation,’ Malcher wrote in his piece. ‘Not enough executives stop and ask who it is that’s making an offer and what their background is.’
For the IXE investors who read it, Malcher’s article served only to confirm their worst suspicions. Sixteen months had now elapsed since Sarao’s arrest, and Garcia still hadn’t released any of the $75 million entrusted to him by the eight or so UK participants, including the $55 million belonging to Nav. For a long time Garcia had blamed Sarao’s legal woes for his intransigence, but when MacKinnon and Dupont persuaded the US government to insert an amendment into Nav’s restraining order authorising IXE to unblock the circa $10 million sitting in the Cranwood account, he moved the goalposts again, saying he now needed sign-off from the authorities in South America. In truth, there was no clear legitimate legal reason why IXE couldn’t release the money, and when Garcia stopped returning calls or answering emails, investors wondered if the Sarao situation had been a convenient fig leaf all along.
ON 14 OCTOBER, 2016, Nav’s barristers arrived at the Royal Courts of Justice in London for one final attempt to halt the extradition. Again, they pressed their case that spoofing wasn’t a crime in the UK, and that, even if it were, the trial should happen in the country Sarao resided. But it was a desperate plea, and shortly after lunchtime the High Court rejected the appeal. Nav was given twenty-eight days to hand himself over to the FBI. Before that he had to make a decision: keep fighting and take the case to trial in the United States, or try to strike a plea deal. His lawyers laid out the situation in stark terms. A trial might take two years to schedule, during which Nav would be incarcerated in a Chicago prison that would make him pine for Wandsworth. And, realistically, his chances of success had nosedived with the emergence of the Crazy Eyes emails, particularly since, with no money, he’d be represented by a public defender. If Nav pleaded not guilty and lost, he could be locked up in the United States for decades. Even for him, it was a gamble too far. Later that month, Burlingame caught a flight to Washington to sound out the DOJ about a deal.
The mood in the United States was buoyant. That summer, members of the various investigating authorities had got together at the DOJ’s cyber lab in Washington for what felt like a reunion. The material seized from Sarao’s parents’ house had been extracted and logged and was finally ready to be viewed. Over the course of a week, Jessica Harris and Jeff Le Riche from the CFTC, Mike O’Neill from the DOJ and one of the FBI agents went through Nav’s files one by one with a detective from Scotland Yard. Also in the room was a Fraud Section manager named Rob Zink, who had inherited responsibility for the case after Brent Wible left to take a job at the White House. After obsessing over Sarao for so long, it felt both thrilling and slightly voyeuristic to be trawling through his hard drive. Early on in the process, the investigators were relieved to discover that the NAVTrader program was intact, complete with logs detailing each time Nav had used it, the trading equivalent of a murder weapon.
If the software program was all the team got that week, they would have been happy, but at some point somebody clicked on a file and a video popped up showing footage of Sarao’s monitor as he traded. It seemed to have been recorded by a camcorder positioned just behind Sarao’s head. The group watched, transfixed, as the trader bought and sold millions of dollars of e-minis, his cursor flying around the screen, placing trades and activating the bespoke functions created for him by Edge and TT. Every once in a while, Sarao’s voice could be heard commenting angrily on the action, or a shock of his black hair appeared at the bottom of the screen. When the clip was over, they clicked on another file, which contained footage from a couple of days later, then another, and another. The team had heard rumours there might be videos. Now they saw he’d been taping himself for years, archiving the clips as evidence of what he perceived as cheating by other market participants. In doing so, he’d captured himself breaking the law again and again.
Watching Sarao in full flow after months spent trawling through lifeless reams of data was miraculous, the speed of his decision making and the way he reacted to the ladder unlike anything any of them had seen before. What had possessed him to document his exploits this way was a mystery, like a robber who takes selfies outside the banks he has hit and leaves them on his phone.
With the Crazy Eyes emails, the trading software and now the videos, the team knew it was game over. Zink, who had a reputation for being an aggressive prosecutor, marvelled at his predecessor’s foresight and guts in charging Sarao when so much crucial evidence had emerged after the arrest. Before they parted ways, the conversation turned to their perennial favourite subject: who was going to play them in the movie. Le Riche bagged Colin Farrell, O’Neill had the studious demeanour of a young Guy Pearce, while Wible, in absentia, was assigned John Goodman. Harris got the last laugh when she insisted she be portrayed by Steve Buscemi.
Walking into the Bond Building, a place he knew well from his previous life with the Justice Department, Burlingame must have been conscious that he and his client had little leverage. By now, the evidence against Sarao was so overwhelming it was hard to imagine the trader getting anything other than crushed at trial. The only chink in the DOJ’s armour was how sympathetic Nav was as a defendant, particularly in comparison to some of his supposed victims at the HFT firms. Even some of the individuals who worked on the case were starting to feel deeply uncomfortable about the idea of sending Nav back to jail. Burlingame had spent years on the other side of the table and, sensing an opening, he asked Zink, an ambitious prosecutor on the DOJ management fast track, whether he really wanted to be remembered for taking down Rain Man. If the Fraud Section was willing to recommend a more lenient punishment when it came to sentencing, Burlingame said, Nav was prepared to plead guilty to some of the charges and help the authorities with their ongoing investigations. At this point, the government’s grasp of electronic trading was still limited, and having an insider explain what he was doing and how the markets really worked could be invaluable. Nav had also collaborated with a bunch of different programmers and brokers over the years whom the authorities might want to target.
Zink and O’Neill went away and considered their options. Flexing their muscles in a high-profile trial was tempting, but it carried some risks. Accepting Burlingame’s offer, on the other hand, would lock in a win and send a message to the markets while also demonstrating some sensitivity as to who they were dealing with. After talking it through internally, the prosecutors agreed to the deal on the condition that Nav confess to everything, show remorse, and prove he had something of value to impart.
For Nav, it was a remarkable outcome, a shot at redemption and clemency that seemed unthinkable a few weeks before. If he didn’t deliver the goods, though, Zink warned, they would be going to trial.
NAV ARRIVED at Heathrow Airport uncharacteristically early on Monday, 7 November 2016, where he and Burlingame were met by two FBI agents. During the flight to Chicago, Nav grilled them on what it was like to work for the Bureau and whether they’d ever hunted a serial killer. It was the week of the presidential election, and, touching down in the United States, images of Donald Trump were ubiquitous. Nav was taken to the Metropolitan Correctional Center, a notorious hig
h-rise lockup in downtown Chicago a block from the CME. Buffeted by noise and activity, he couldn’t sleep. The next morning, he was escorted to the Dirksen Federal Building, a blacked-out thirty-storey monolith nearby that houses both the federal courthouse and the US Attorney’s Office. Nav’s plea hearing was scheduled for the following afternoon in a courtroom on the twenty-third floor. Before that, he had back-to-back meetings with the DOJ and the CFTC in an interview room on the fifth.
Nav’s first debriefing was with Zink and O’Neill from the Fraud Section as well as the FBI agents. Burlingame was also in the room. The opening ten minutes in any such encounter are critical and, based on what they’d heard about Sarao’s mental faculties, the government was unsure what to expect. They needn’t have worried. Nav answered the crucial early questions about his conduct and why he was there articulately and without equivocation. Asked if he knew that what he was doing was illegal, he replied, ‘Yes.’ Asked if he placed orders that were intended to deceive others for money, he said he did. With the confessions in the can, the next several hours were spent talking through the indictment line by line. Nav filled in the gaps in the DOJ’s knowledge and pointed out where they’d got it wrong with a veracity that made it seem like he had truth serum running through his veins. After the stress of the past few years, he said he was relieved it was finally over. They touched on Nav’s brokers and programmers, his competitors, his thoughts on HFT and what he did with all the money. Nav was adamant that manipulation and spoofing were endemic in the markets, and he said he knew how to identify them. The frank and lucid way he spoke left the DOJ in no doubt that he was someone they could work with. When it was over, they bought him some food: Nav was excited to try a real American burger.
Waiting patiently to strike his own separate settlement with Sarao was the CFTC’s Le Riche. There’s a danger for the civil authorities in any multiagency investigation that they get steamrolled by their criminal counterparts, and the CFTC had been somewhat blindsided to discover that the DOJ had provisionally agreed to a plea deal. Deprived of a trial, Le Riche and his colleagues – the ones who had kick-started the investigation – wanted to at least make sure they had a settlement of their own to announce when Sarao pleaded guilty. When Burlingame, Sarao and Le Riche eventually sat down over coffee, the focus of the conversation was money, or more specifically, how much Nav would have to cough up. CFTC penalties are made up of disgorgement, which is a defendant’s ill-gotten gains, and a civil monetary penalty, which can be up to three times that amount again. The DOJ had already agreed on a disgorgement figure of $12.87 million as part of the plea deal, so it was up to Le Riche to decide how much extra to levy. Burlingame said he wanted to make sure that when Nav was out of custody and no longer allowed to trade, he would have something to live on. Le Riche countered that Sarao shouldn’t get to keep anything he’d made from cheating. In the end, they agreed on a CMP of two times the gains, bringing a total of $38.6 million. It was an eye-watering sum, but if IXE ever actually returned Nav’s money, he would still be left with a few million in the bank.
By now, Nav had been awake for more than forty-eight hours, and as another sleepless night in jail loomed, Burlingame pressed the DOJ to show some compassion and let his client spend the night in a conference room while an FBI agent stood guard. The prosecutors and agents considered the request, but in the end they concluded that the security risk was too high and sent Nav back to the lockup.
The following day, 9 November 2016, the plea hearing began at 2 p.m. News of Donald Trump’s election as president cast a surreal pall over proceedings. The gallery at the back of the vast, windowless courtroom was little more than half full: a handful of government attorneys, a smattering of tired-looking journalists engrossed by their phones, some futures industry hawkers. Jessica Harris, who had recently left the CFTC, made the trip from Washington. None of Nav’s family or friends were there. Nav emerged from a door at the front in an orange jumpsuit and ankle chains and took his place on the stand. ‘Yes, your Honour … No, your Honour … Yes, your Honour,’ he mumbled, as the judge asked him about his mental state and whether he understood the ramifications of his decision to plea. He then pleaded guilty to two of the twenty-two counts he was originally charged with: one for wire fraud, which covered his conduct over the entire five-year period, and a second for a single instance of spoofing in March 2014. The commodity fraud and manipulation counts were dropped.
Sentencing in the United States is calculated using the Federal Sentencing Guidelines, a points system that involves allocating a defendant an offence, adding and subtracting levels according to the specifics of their crimes, and taking into account their criminal history. For Nav, this exercise resulted in a recommended jail term of between seventy-eight and ninety-seven months. Under the terms of the deal, however, Nav would be given an opportunity to ‘earn off’ part of his custodial sentence – perhaps even all of it – by providing assistance to the government in any civil or criminal investigation they needed him on. Normally, a defendant would provide such cooperation while they were in prison, but the DOJ had agreed to allow Nav to return to the UK and help them from there. When the judge expressed some scepticism about this highly unusual arrangement, Burlingame stepped in: ‘Basically, he has some extraordinary abilities with respect to pattern recognition and certain sorts of mathematical abilities, but he has some fairly severe social limitations and other limitations, and his ability to fulfil the cooperation terms of the agreement I think would be non-existent if he were to be incarcerated.’
The judge agreed, on the proviso that Nav give up his passport, desist from trading futures, avoid drinking too much, steer clear of any potential witnesses and keep an 11 p.m. curfew. His sentencing would be postponed until the DOJ no longer had any use for him. The judge asked Nav to confirm he agreed to forfeit the $12.87 million, and Burlingame said he did, although so far Kobre & Kim had still only managed to retrieve $6.5 million – essentially what was seized from the R. J. O’Brien trading account. ‘Judge, if I might, we’ve been engaged in a process with the CFTC for the last sixteen months of attempting to collect the defendant’s assets all of which have been stolen from … I mean, he invested in a Ponzi scheme,’ the lawyer explained. In lieu of the full amount, the judge agreed for Nav’s parents and brother, Jasvinder, to place a lien on their homes to the value of $750,000. To confirm the arrangement, she placed a call to Hounslow that was played on the courtroom’s speakers.
‘Good evening. My name is Judge Kendall, and you are on the record and in open court. Can you please tell me who is on the phone?’
‘My name is Nachhattar Sarao.’
‘And do you also have Daljit with you?’
‘Yeah, she is here as well.’
‘Okay. All right. Mr Sarao, I am here in my courtroom in Chicago where your son has just plead guilty to the charges against him, and I am considering releasing him with some significant conditions of release … He has as a proposal here that your home that you live in with your wife will be part of a bond package, meaning that if your son violates one of the conditions of bond that I put on him, you could lose your home. Do you understand that?’
‘Yes. Yes, ma’am.’
After walking Nav’s parents through the terms of his release, the judge asked Nav’s father if he had anything to add. ‘I just want to say most everything, he doesn’t take any sort of intoxicant at all. He doesn’t even drink tea or coffee,’ Nachhattar said, and his son shook his head with embarrassment. The judge had a similar conversation with Jasvinder, then brought the proceedings to a close. Nav’s lawyers and the DOJ agreed to come back in a few months’ time to provide an update on how the cooperation was going. For the time being, Nav was free to leave. Watching him shuffle out of the courtroom at a little after 3.30 p.m., the investigators, agents and lawyers who had worked so hard for this moment were struck by a strange combination of deflation and relief. Someone asked if Nav knew how to get to the airport and what flight he needed to c
atch. Then they went for dinner and raised a toast to the notorious Flash Crash Trader.
CHAPTER 25
CATCH ME IF YOU CAN
After one of IXE’s investors threatened to impale his head on a spike, Alejandro Garcia called a creditors’ meeting at the Marriott Hotel in Zurich for 21 November 2016. It was a Monday, and that morning between fifteen and twenty participants and their advisers travelled from the UK and elsewhere to hear Garcia explain what he’d done with their money and why he’d stopped paying interest. If they weren’t satisfied, they had agreed in advance, they would go to the authorities. The Marriott, which overlooks the Limmat River in Zurich’s picturesque old town, is a popular venue for weddings, and the conference room was set up for a reception. Garcia and another IXE director sat at a long table at the front with two lawyers, including a large, glowering Swiss-German with a thunderous voice named Dr Felix Fischer. Behind them, and dotted around the room, were security guards. The investors, who had to show ID before they were allowed in, occupied half a dozen or so round tables draped in white linen.
Garcia thanked everyone for making the trip and then launched into a PowerPoint presentation. He clicked quickly past a ‘Disclaimer’ that stated IXE gave no ‘representation or warranty’ into the ‘accuracy … completeness or fitness for any purpose’ of what he was about to say. Landing on a slide with the heading ‘Current Situation’, Garcia said that IXE had been hit by a global downturn in commodities that was ‘impossible to predict’. That was why, in 2014, the company had diversified away from backing the ‘riskless’ trades of others to making its own direct investments in the agricultural sector. This change in tack would have ‘preserved capital’ and brought ‘stable returns’, he said, if it hadn’t been for ‘a legal issue, related to a major Investor Participant’ that resulted in ‘the company and related companies’ facing ‘a collateral reaction within banking and commercial relations’. Sarao’s legal problems, in other words, had thrown an international conglomerate with, according to its own literature, seventy-two thousand employees and $5 billion in annual revenues, into disarray.