by Liam Vaughan
Having a renowned finance professor testify that Sarao’s trading was consistent with spoofing was helpful, but there were still some big holes in the investigation, not least a lack of tangible evidence of Sarao’s intent. The team’s efforts to get Nav to sit down for a voluntary interview in the UK had gone nowhere, and the CFTC lacked the legal powers to access his communications. A breakthrough came in June 2014, with the arrival of a new head of enforcement. Aitan Goelman was a spiky former prosecutor from the Southern District of New York who made his name as a member of the team that prosecuted Timothy McVeigh, the Oklahoma City bomber. After hearing about the case in Kansas City, Goelman suggested they see if the Justice Department was interested in coming on board. The CFTC had recently partnered with the DOJ on the Libor scandal, a sprawling, multiyear investigation into interest-rate rigging across Wall Street, and Goelman was aware just how useful the criminal authorities’ powers could be. At this point, Commodity Exchange Act violations were rarely charged as felonies, but the reverberations of the Flash Crash were felt around the world. ‘I wanted the deterrent effect of putting an actual human being in jail,’ says Goelman. ‘It’s much more effective than taking some money or getting a cease-and-desist order,’ the sanctions at the CFTC’s disposal.
The American criminal justice system is divided into ninety-three local US Attorney’s Offices, plus ‘Main Justice’, the head office in Washington, and Goelman had a decision about whom to refer the case to. There was his old stomping ground, the Southern District in downtown Manhattan, setting for the HBO show Billions, where the biggest white-collar cases tended to reside. There was the Northern District of Illinois in Chicago, heartland of futures, where at that moment the first-ever criminal spoofing case, involving a former pit trader from New Jersey named Michael Coscia, was taking shape. In the end, Goelman reached out to an old buddy from law school and the Southern District who had taken up a senior role in the Fraud Section at Main Justice. The two had worked a gang case together early in their careers, and when Goelman told him about Sarao, the supervisor agreed to assign some of his best people to take a look.
Picking up the baton at the DOJ were the prosecutors who would be there at McDonald’s in Hounslow for Sarao’s arrest, Brent Wible and Mike O’Neill. Wible, another Southern District alumnus, was raised in Kentucky and had a penchant for country music, particularly Johnny Cash. He wore Buddy Holly glasses, moved slowly and methodically, and brought a welcome air of unflappability to the investigation when pressure to file charges was mounting. His partner, O’Neill, was a rookie in the Fraud Section with a perfect faux-hawk haircut, a magna cum laude degree from Harvard law, and the dedication of an Eagle Scout. After a couple of telephone briefings, the pair flew to Chicago with their CFTC counterparts to watch a presentation from Mr X. Manning the software was the whistle-blower’s European programmer, who didn’t say much but picked up the nickname ‘Crazy Eyes’ thanks to his intense expression. By the end of the trip, the DOJ was convinced that Sarao was a massive manipulator but concerned about the lack of evidence of intent – an even bigger consideration for the criminal authorities, since they would have to prove their case beyond a reasonable doubt. Fortunately, they had some levers to pull that the CFTC didn’t. The Justice Department’s investigative arm is the FBI, and Wible recruited an agent in Chicago to pull together a search warrant request that would give them access to Sarao’s private emails. When the judge signed off, they waited for the results to come back with one eye on the calendar.
NAV CALLED Brian Harvey, the tax guru, in an uncharacteristically glum mood. On paper, he was a very rich man, but the empire he’d spawned had become so byzantine and unwieldy it was causing him anxiety, and he was concerned that some of his advisers might be, in his words, ‘taking the piss’. Two years had passed since Cranwood Holdings Limited had been set up with $15 million of Nav’s money, and so far not a single plot of land to house wind farms had been secured. During that time, he complained, the business had eaten through more than $3 million. Martin Davie, the irascible Scotsman running things, had been paying himself a six-figure salary despite having a second CEO job with his other wind company. At first, Nav had kept his distance, rarely attending the monthly get-togethers or going through the budgets. However, recently he’d started to examine the expenditures and he was incensed. Not only was Nav funding the Edinburgh office, but MacKinnon and Dupont were charging Cranwood $3,000 a month to help cover their rent in Berkeley Square, on the grounds that they were spending time there on Wind Energy Scotland. Cranwood also footed the bill for a corporate membership at Archerfield, a spectacularly picturesque Scottish golf club, because Davie said it was essential for building relationships.
Unlike many of the people in Nav’s orbit, Harvey was paid a fixed sum for his services and so had no vested interest in how the trader invested his money. After helping Nav avoid a $10 million tax bill in 2011 by establishing a complex ownership structure in the Cayman Islands, he’d come to the rescue again a couple of years later, relocating the operation to Guernsey when the Caribbean administrators got cold feet. Lately, Nav had taken to calling Harvey up regularly to seek his advice or just for a chat. Harvey had four children not much older than Nav, and he had grown to feel protective of his impressionable young client. On several occasions, he’d warned Nav away from proposals, telling him that if something seemed too good to be true, it probably was. Whenever Nav felt out of his depth, he asked Harvey if he would be willing to take over the day-to-day running of his business empire. Nav was a trader at heart, and all these distractions were throwing him off his game. Harvey always politely declined, saying it went beyond his skill set. He was approaching retirement and looking to slow down. Before hanging up, he urged Nav to raise his grievances with MacKinnon and Dupont and try to simplify his affairs.
When Nav eventually stumped up the courage to confront MacKinnon and Dupont, they told him that the forthcoming referendum on Scottish independence was making it difficult to secure commitments, and assured him that things would pick up when it was out of the way. They agreed to pay back $60,000 for the disputed rent and flew him to Edinburgh to spend some time with Davie and the team. Nav had rarely visited the countryside and, peering out the window during one drive, he exclaimed: ‘What the fuck is that … It’s a fucking sheep!’ The visit culminated on a golf course, where, for nine interminable holes, Nav whiffed a ball around while his companions looked on through strained smiles. Later that year, with relations repaired, MacKinnon and Dupont introduced Nav to a new opportunity they’d heard about on a networking trip to the French Riviera. Rather than cutting ties with the financiers, Sarao ended up plunging headfirst into another venture.
DAMIEN O’BRIEN is six feet four and wears a ponytail that gives him the air of a young Steven Seagal. On the day he met MacKinnon and Dupont, he arrived at a beachside restaurant wearing white trousers with an oversize Hermès belt buckle, a pink shirt and Gucci loafers, and immediately ordered a dozen bottles of champagne for the busy table. O’Brien hailed from an Irish family and made his first fortune subleasing vacant rooftops to telecom companies, before moving to Manchester, where he got in with a professional football crowd. It was there that he came up with the idea that would make him rich: X Factor for football. The show, named Football Icon and later Football’s Next Star, offered talented underachievers one last shot at joining the academies of some of the world’s biggest clubs. It was picked up by Fox, which replicated the format around the world, providing O’Brien with a stream of income that he splashed around with a generosity that bordered on the pathological. He moved into a mansion previously owned by Cristiano Ronaldo that was plastered with the footballer’s trademark ‘CR7’ crests, and was now looking for investors for a new business he was launching in the online gaming space.
O’Brien’s latest venture combined two of Nav’s passions: markets and gambling. The Irishman had established a company called Iconic Worldwide Gaming that would allow punters to bet on mov
ements in currencies and securities using an interface that looked like an online casino, with a roulette wheel and buttons for higher and lower instead of red and black. ‘Financial markets are on the news and in the paper daily, part of modern daily life,’ ran a pitching document. ‘But participating in that market is seen as daunting and targeted at experienced, number-crunching wizards, involves countless spreadsheets, brokers, expenses and commissions, and huge potential downsides. Wouldn’t it be great to just put a ‘bet’ on gold to rise next or where the FTSE will land?’ The patented software was called MINDGames, short for Market Influenced Number Determination Games. It may not have pleased Gamblers Anonymous, but the projections were mouthwatering. O’Brien predicted the company would go from a standing start to a cash balance of $175 million by the end of its third year. He had also attracted some big names to the board, including the former CEO of betting giant Ladbrokes and a High Court judge.
Nav was immediately taken with O’Brien, who was gregarious, upbeat and larger-than-life. Like Nav, he had come from humble beginnings and lived by his own rules. Unlike Nav, he was the centre of any party, and he took the young trader for a couple of nights out in London with his high-rolling friends. Shortly after they met, the football World Cup was taking place in Brazil, and Nav took some time off to immerse himself in the tournament, which he feverishly looked forward to every four years, going as far as to buy himself a replica of the trophy. O’Brien rented a boardroom with a giant television screen at 45 Park Lane, a five-star hotel overlooking Hyde Park, and the Iconic team would watch the matches there after business meetings. Later, when O’Brien found out how much Nav loved Lionel Messi, he gave him a framed pair of boots signed with what he claimed was a personal message by the Argentinian superstar. Midway through the tournament, on 1 July 2014, Nav invested $3.8 million in Iconic Worldwide Gaming in exchange for a stake in the low double figures. O’Brien talked hungrily about how they were going to conquer America. That week, Nav won a long-shot bet on the football and chuckled at his good fortune.
SARAO’S EMAILS landed at the Justice Department shortly after Christmas 2014, and they bolstered the case significantly. The material fell into two broad categories: ‘trading’ and ‘money’. The first bucket included Sarao’s messages to Hadj at TT in 2009 laying out the modifications he wanted to make to his off-the-shelf software and, later, thanking the engineer for helping him build the layering algo. Then there was his ongoing correspondence with Jitesh Thakkar at Edge regarding the creation and development of the more sophisticated NAVTrader program. Bucket two was made up of documents and interactions relating to Sarao’s business outside trading, including records of multimillion-dollar deposits into IXE and Iconic and invoices from Harvey for tax advice. They helped show how much money Sarao had made, and his use of havens like the Cayman Islands to squirrel it away. The DOJ shared the material with Le Riche, Harris and their colleagues at the CFTC, and staff from the two agencies trawled through the evidence late into the evenings. In their downtime, they joked about who was going to play them in the inevitable movie.
From a prosecutor’s point of view, having Sarao describe his algorithms in his own words was desirable because it made it harder for the trader to lie about his intentions on the stand. There were also the kind of nuggets that tend to resonate with a jury, like Sarao’s boast about telling the CME to ‘kiss my ass’. His recent response to the CFTC’s questions contained demonstrable falsehoods and omissions, and there were several examples of Sarao complaining to the CME about what he perceived as cheating by his rivals, which, while highlighting broader issues in the markets, suggested that he understood what was and wasn’t allowed.
Taken together, the evidence was about as strong as any prosecutor could realistically hope for in a white-collar case. Still, there was nothing to blow the whole thing open; no clumsy acknowledgment buried in the email archives that showed he was deliberately seeking to manipulate the market and that he knew what he was doing was against the law. Maybe that was too much to hope for, but the Fraud Section instructed the FBI to start preparing a search warrant so that, when they arrested Sarao in the UK, they could simultaneously take possession of his computer and other effects. They also began the process of securing the expedited backing of the British regulator and the Metropolitan Police for an overseas raid, a delicate process that would normally take several months.
In the meantime, the prosecutors debated what laws to charge Sarao with breaking. It was a complex decision that could have serious ramifications for their prospects of success down the line. A major consideration was the fact that, before Sarao could even stand trial in the United States, they would need to secure his extradition from the UK. In international law there is something called the ‘Doctrine of Specialty’ that states that an individual can be tried only for the offences for which they were extradited. Since the prosecutors couldn’t add charges at a later date, only subtract them, it was in their interests to cast the net wide. Eventually, Wible, O’Neill and their colleagues settled on twenty-two counts encompassing an array of statutes with different criteria. The first was garden-variety wire fraud, a kind of catchall offence that involves knowingly operating a scheme to obtain money by making false representations or promises using electronic communications – in this case the orders Sarao placed on the CME over a five-year period. Counts two to eleven related to individual instances of alleged commodities fraud. Twelve through twenty-one were examples of alleged manipulation and attempted manipulation, that slippery offence that had historically proven so difficult to land. The final count was for a solitary instance of alleged spoofing in March 2014, after the CFTC’s disruptive trading guidelines had been published, which would give the government an opportunity to test the new statute in a courtroom without staking the entire case on it. Cumulatively, the maximum sentences for the charges added up to 380 years.
As they raced to beat the statute-of-limitations deadline, the authorities discovered that Sarao was trading again. By now, most of his money was locked up in investments, but in October 2014 he’d opened a second brokerage account with R. J. O’Brien, depositing $8 million. He’d also contacted Thakkar at Edge about making further refinements to NAVTrader. The agencies knew they had to move quickly, and the CFTC started pulling together a motion for a restraining order.
Compiling the dossier of evidence, Harris was once again struck by just how unusual a target Sarao was. At the time, the enforcement division was working on a fairly typical case involving a serial fraudster named Anthony Klatch who lied about his investing prowess to misappropriate funds that he squandered on fast cars and cocaine. Sarao was the exact opposite, concealing his talents from the people around him and never spending the money he made. The emails the DOJ had seized offered some glimpses into the man behind the screens. There were laments about how his parents were pressuring him to get married, and boasts about his success with women that came off like teenage braggadocio; references to his father’s diabetes and declining health; social invitations that he accepted and then backed out of at the last minute. ‘It happens a lot in these cases,’ says Harris. ‘You have a perception of someone and then, as you look through their bank statements and interview their associates and read their emails, a real person emerges. Sometimes that weighs heavy.’
Meanwhile, Goelman, the new head of enforcement, was navigating more political waters. Throughout the investigation, the CFTC had been aware that linking Sarao to the Flash Crash might leave the agency open to criticism, and with Nav’s arrest looming, such considerations came to the fore. ‘You’re faced with a choice,’ says Goelman. ‘You’re concerned about protecting the reputation of the agencies and you don’t want to admit that you missed something, so do you just practise wilful blindness or do you investigate and go wherever the facts lead even if it’s going to be embarrassing?’ The CFTC held its course, but there were drawn-out discussions between the team and senior management about how to describe Sarao’s involvement in
a way that was justified by the evidence while minimising the appearance of a conflict with the earlier findings. They also had the SEC, their coauthors on the 2010 report, to consider. In early 2015, Goelman and the CFTC’s new chairman, Tim Massad, hosted a conference call with SEC head Mary Jo White and her head of enforcement, Andrew Ceresney, to talk through what was coming. When Goelman finished laying out the evidence, their counterparts thanked him for the heads-up and asked jokingly what the hell the CFTC was thinking reopening a matter that had already been laid to rest.
On 11 February 2015, four years, nine months and five days after the Flash Crash, Wible flew to Chicago and made his way to the federal courthouse with the agent he’d drafted from the FBI. Inside, they presented a judge with a copy of the freshly completed complaint against Sarao as well as a warrant for his arrest. The judge signed the documents and sealed them from public view until the authorities were ready to pounce. Nav’s life was already over – he just didn’t know it yet.
EVER SINCE Jesus Alejandro Garcia Alvarez appeared in Zurich out of nowhere in 2006, he’d talked about wanting to buy a bank. Swiss secrecy laws are among the strongest in the world and, for the very wealthy, owning your own lender can be more efficient than parking your money elsewhere, which explains why there are around four hundred bank branches in a city of four hundred thousand people. After a couple of false starts, Garcia was introduced to the owners of Banca Arner, a small private bank founded in 1984 in Lugano. Arner had been struck low after it emerged that Italian prime minister Silvio Berlusconi, on trial for tax fraud, had hidden tens of millions of dollars there. So, in 2014, Garcia purchased a 9.8 per cent stake for a few million euros and convinced the board to let him acquire the rest. Citing his experience at IXE, Garcia said he wanted to transform Arner from a discreet bank into a powerhouse that would help facilitate the trading of commodities and agricultural goods around the globe. In June, Arner opened an office in Zurich, and Garcia began recruiting executives, including his wife, Ekaterina, whom he named head of media relations. He also found a new chairman, a big player in Swiss banking circles named Michael Baer, part of the Julius Baer family, who he hoped would help smooth the takeover with the regulator.
