COLUMN: “Flash crash” spoofer and his software provider — where are we now?

A recent report on the concealment of beneficial ownership provides a sideways look at the notorious exploits of the “Hound of Hounslow,” Navinder Sarao, in an anonymised case study. The report was a joint effort between the Financial Action Task Force and Egmont Group.

It originated in the Crown Dependency of Guernsey and is described as illustrating how a Guernsey Trust and Company Services Provider (TCSP) had been “exploited” by a foreign client to administer a company used to facilitate market manipulation, of which it had been unaware over a five-year period. As a result, they had not provided any suspicious transactions reports concerning the client to the Guernsey authorities.

Their client “Mr. X Doe” had made approximately £32 million and his “purported legitimate business” had been futures dealing. The company had previously been administered by a Cayman Island company. Sarao had been accused of making £32 million ($40 million) by a grand jury in the United States. According to the report the TCSP had subsequently identified that Mr. X Doe had been under investigation by the Commodity Futures Trading Commission (CFTC) and had cooperated with the Guernsey AML/CTF authorities.

The CFTC indicated in the Sarao press release relating to the Sarao consent order that they had acknowledged the assistance provided by the Guernsey Financial Services Commission (GFSC). Sarao subsequently pleaded guilty in a related criminal case brought by the Department of Justice (DoJ) and entered a plea agreement. Sarao was released on a bond of $750,000 and has returned to the UK.

Under his plea agreement he has committed to providing complete and truthful information in any investigation and pre-trial preparation and complete and truthful testimony in any criminal, civil, or administrative proceeding and to the postponement of his sentencing until after the conclusion of his cooperation. A DoJ spokesman said there was as yet no public court date for this pending case.

Press reports have indicated that much of Sarao’s criminal spoofing proceeds were lost having been invested in a range of offshore vehicles and structures selected to make substantial returns or to avoid tax liabilities. The DoJ in its complaint stated in this regard that, around the time of the “Flash Crash,” he had established a new entity, Nav Sarao Milking Markets Limited, which was incorporated in Nevis.

This appeared to have been created as part of a tax avoidance strategy pursuant to which he had also established, in 2012, International Guarantee Corporation (IGC), incorporated in Anguilla. One of his “wealth management assistants” had described IGC as having been created as part of “tax planning work” undertaken by his firm on Sarao’s behalf. A 2014 filing at Companies House relating to Sarao’s trading vehicle, Nav Sarao Futures Limited, refers to an investment at Iconic Worldwide Gaming Ltd, which was engaged in the creation of an online gaming platform.

Nav Sarao Futures went into administration in 2016. The statement of administrators indicated, however, that IGC, and not Nav Sarao Futures had been principal shareholder of the company. The shares were believed to have been transferred to IGC in December 2014. There were also two companies registered at the Nevis corporate registry in June 2010, The Nav Sarao Futures Limited Employee Settlement and the Sarao Futures Employee Benefit Trust 2.

Reuters reports have also linked Sarao to Security Atlantic Life Insurance Limited in Anguilla, a tax consultant Brian Harvey and Hinduja Bank in Switzerland. IGC has also been linked to IXE Financial Corporation and Hinduja Bank in documents relating to the DoJ case against Sarao. Sarao’s plea agreement and Jitesh Thakkar Jitesh Thakkar has been the subject of both a criminal and a civil action prompted by evidence of communications in the context of his position as Sarao’s software vendor.

He was the founder and principal of Edge Financial Technologies, Inc (Edge), an information technology consultancy in Chicago. The DoJ complaint against Thakkar refers to “Trader #1”, who is described as a futures trader who lived in the UK. It is clear from documents addressed to Thakkar in the public domain that Trader #1, who “traded from proprietary trading companies in London and from his residence in West London, England” is Navinder Sarao

The documents in the public domain also include an email from Sarao to Thakkar dated October 12, 2011. There is a sentence in the email, at para 3, which begins: “Back of the Book— for both of the order types we need to have the option to keep the order at the back of the book.” This also appears at page 10 the Department of Justice Thakkar complaint and at page 7 of the CFTC Thakkar complaint.

The case against Thakkar is that he had developed a software program that was used by Sarao to engage in spoofing through the placement of thousands of orders on the Chicago Mercantile Exchange (CME) when Thakkar was the founder and principal of Edge. Thakkar seeks case dismissal Thakkar is seeking to have the criminal charges of conspiracy to commit spoofing and two counts of aiding and abetting spoofing dismissed.

He is arguing the prosecutors have stretched the anti-spoofing statute too far as all other cases of spoofing had concerned traders. He pleaded not guilty to the charges in February on the basis, inter alia, that the prosecution had violated the constitutional bar on arbitrary enforcement by deciding to charge him and not other computer programmers involved in similar illegal trading.

The prosecution case against Thakkar was that he had exchanged emails with Sarao about the software’s ability to delete orders before they were filled which had been crucial in proving intent to manipulate the market. Thakkar also cited the Michael Coscia case that had only addressed how the statute could be applied to traders, pointing out that the software developer in that case had not been charged. Crime victims’ rights U.S. District Judge Robert Gettleman signed off on the prosecutors’ unopposed motion for authorisation to use alternative victim notification procedures — namely, publication on a DoJ website.

The prosecution argued the spoof orders at issue in the case had been placed using Thakkar’s software and may have affected hundreds of counterparties and other market participants, all potential crime victims, that had traded E-mini futures contracts while the spoof orders were pending in the market. Given the number of potential crime victims, this case involved “multiple crime victims” under 18 U.S.C. § 3771(d)(2) it was impracticable for the government to identify and provide individualised notice to each potential crime victim.

Published 09-Aug-2018 by Helen Parry, Regulatory Intelligence

Produced by Thomson Reuters Accelus Regulatory Intelligence 13-Aug-2018

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