by Liam Vaughan
The government was represented by a hyperactive young prosecutor named Renato Mariotti, whose approach was to cut through the industry-speak and statistics and bring the discussion to a level that the jury – men and women from the same Chicago streets as him – could engage with. He called a chicken company executive as a witness to explain how ordinary businesses relied on commodity markets, and treated cross-examination like a performance, chuckling to himself, rolling his eyes and goading Coscia until the trader bellowed from the stand: ‘I’m not dealing hot dogs, I’m dealing futures!’ At the end of the trial, Mariotti turned to the jurors and, with the poise of an actor delivering a soliloquy, said: ‘You know, it reminds me of something that I used to see on the playground at school when I was a boy. There was a kid who would put his hand out like this, like he was trying to shake your hand, and he’d pull it away right when you were about to shake his hand, or he’d put his hand up like this like he was going to give you a high-five, and he’d pull it down like that. He thought that was very funny. I didn’t. But, it was a trick, right? … And ladies and gentlemen, that’s the exact same thing that happened in this case.’
It took the jury less than an hour to find Coscia guilty. He was later sentenced to three years in prison, earning him the unfortunate accolade of being the first individual in the history of financial markets to serve time for spoofing. The case shattered the perception, built up over decades, that manipulation-type cases were nearly impossible for the government to win, and represented a disastrous omen for Sarao, who had used his program for five years next to Coscia’s ten weeks, and earned $40 million versus Coscia’s $1.4 million.
Rounding out a season of bad news, just before Christmas, an Illinois judge dismissed Bill ‘Cornbread’ Braman’s suit against the CME, the class action Nav had considered joining and that had imbued him with a sense of misplaced confidence regarding his own predicament. Braman et al. had accused the CME of granting HFT firms special privileges, creating a two-tiered marketplace that allowed predatory strategies to thrive. But the judge concluded that the plaintiffs lacked any specific evidence and questioned why they had sued the exchange rather than the firms themselves. ‘This Court’s task is not to adjudicate the fairness or appropriateness of high-frequency trading,’ he wrote, providing little solace to Cornbread and his pals, who wondered how they were supposed to get hold of any hard evidence without access to the CME’s trade data.
With no money, and evidence mounting up against him, Nav’s last remaining hope was to convince the British courts to block his extradition. The two-day hearing was held in the first week of February 2016, in the by now painfully familiar environs of Westminster Magistrates’ Court. Nav arrived flanked by lawyers and looking respectable in a dark suit and tie. Only sharp-eyed observers would have noticed his trousers and jacket were a different shade. Extradition between Britain and the United States is governed by a treaty that dictates that both countries will hand over criminal targets in all but the most exceptional circumstances. There is a list of possible objections, or ‘bars’, that an individual can raise, but the barrier to success in each is so high that extradition is almost considered a formality. For the United States to prevail, it does not have to prove its case, only that there is a case to answer. Britain’s readiness to give up its citizens has been the subject of considerable controversy, and in 2010 the government ordered an inquiry into whether the regime was fair. Lord Baker, who led the review, concluded it was, but the issue refused to die thanks to a string of high-profile cases, including that of Gary McKinnon, a Glaswegian IT worker who hacked into various US military and NASA computers, leaving messages like ‘Your security is crap’. McKinnon, who was diagnosed with Asperger’s and suffered from psychotic episodes, said he was looking for evidence of UFOs. His plight became a cause célèbre among MPs and public figures such as David Gilmour, Chrissie Hynde and Bob Geldof, who recorded a song to drum up awareness. The campaign failed to sway the High Court, but on the eve of McKinnon’s departure, then-home secretary Theresa May intervened to block the extradition on human rights grounds. The case might have provided a useful precedent for Sarao except for the fact that, uncomfortable with the pressure she’d been placed under, May had permanently rescinded the power of the home secretary to consider last-minute representations, removing another possible avenue for appeal.
As Sarao took his seat in the dock, the atmosphere was as charged as when he’d first sat there, blinking and befuddled in a yellow sweatshirt, the morning after his arrest. Over the past ten months, his celebrity had grown, and journalists had travelled from as far as India and the United States to attend. Unlike in a standard trial, there is no presumption of innocence in a UK extradition hearing. The onus is on the accused to demonstrate to the judge why they shouldn’t be extradited. Arguing on Nav’s behalf was Lewis, one of the few barristers with any pedigree blocking US extradition requests. When Lewis and his junior, Joel Smith, took on Sarao’s case, they planned to attack the DOJ’s assertion that the trader had anything to do with the Flash Crash, arguing in a pretrial hearing that the association was unsubstantiated and would make it impossible to get a fair trial. Since then, the Americans had barely mentioned the events of 6 May 2010, in court. As it stood, Lewis’s best argument was that, while Nav’s antics might have constituted an offence in the United States, they wouldn’t have in Britain, and the case therefore failed the Extradition Act’s requirement for ‘dual criminality’. ‘The key question for this court is whether the conduct of Mr Sarao amounts to a crime if it were to happen in the UK’, said Lewis, pointing out: ‘There is no English crime of spoofing.’
Literally speaking, he was right. Neither the Financial Services and Markets Act nor the Financial Services Act that succeeded it makes any reference to spoofing, or the act of placing orders you don’t intend to execute. The US government claimed, however, that Sarao’s behaviour was caught by sections of the legislation prohibiting ‘misleading statements’, as well as by the Fraud Act, which says it is an offence for a person to make a ‘false representation and in doing so’ makes a ‘gain for himself or a loss for another’. That contention raised the novel legal question of whether a trader’s orders can, in and of themselves, be classified as statements or representations. Lewis argued no, pointing out that more than 90 per cent of all e-mini orders are cancelled. To help make the case, he relied on the testimony of a professor named Larry Harris from the University of Southern California, who was patched into the courtroom via video link. Harris, an ex-SEC economist who wrote a book called Trading and Exchanges: Market Microstructure for Practitioners, had worked with Burlingame on a prior case, and agreed to take the job in part because he was so affronted by the DOJ’s decision to link Sarao to the crash.
Harris’s job as an expert witness was to explain how electronic trading worked, and he emphasised repeatedly that any orders that enter the book are at risk of being hit, particularly those of someone like Sarao, whose connection to the exchange was many times slower than most HFTs. The United States ‘characterises these orders as being bogus, but they were real orders that exposed the defendant to the real possibility of trading at the prices at which he posted his orders’, Sarao’s lawyers wrote in a summary argument. Harris also suggested that layering orders away from the best offer was a legitimate tactic used by participants to capitalise on the rare occasions when a large, aggressive buyer comes along and sweeps up several levels of the ladder at once. By placing such orders, Harris suggested, Sarao was actually providing valuable liquidity to the market, unlike the class of ‘parasitic’ high-speed entities he called ‘quote-matchers’, who were in the habit of waiting for large sell orders to show up in the ladder, then placing orders of their own one level lower, a practice known as ‘leaning’. It was an interesting insight into the tactics of some HFT firms and the ethical arguments around spoofing, but, as the judge pointed out, Sarao wasn’t on trial yet and the legal issues at hand were narrower than that. Under cross-ex
amination, Harris’s credibility as a witness was called into question when he was forced to disclose that, unlike Hendershott, he’d never actually seen Sarao’s trading records. Sarao had run out of money after Harris was taken on, and the professor agreed to complete the assignment for a fraction of his normal rate. His conclusions, as a result, were entirely theoretical.
Perhaps the biggest hit to the ‘dual criminality’ argument came from the revelation that, just a few months before the hearing, Britain’s financial regulator had fined a Swiss hedge fund called Da Vinci Invest Ltd. £7 million for spoofing and layering. It was a civil rather than criminal action, but the facts were strikingly similar, undermining the assertion that Sarao’s actions wouldn’t constitute an offence in the UK. As the discussion swirled around him, Nav sat slumped forward with his head bowed, prompting the judge to ask after his well-being. Lewis said his client was fine but revealed that, as well as having Asperger’s, Sarao was now being treated for post-traumatic stress disorder following his time in jail. In the past, such a diagnosis might have offered up another argument against extradition, but recent case history made it clear that a target’s mental health was rarely considered sufficient grounds to block a request.
The defence’s second argument related to jurisdiction. According to the Extradition Act, an individual should not be extradited if the judge decides it is not in the ‘interests of justice’, taking into consideration such factors as where the bulk of the offending took place, where the victims were, access to evidence and whether the British authorities intended to carry out their own proceedings. Sarao traded exclusively from the UK and, as Lewis pointed out, had never even visited the United States on holiday. Plus, the e-mini was a global marketplace whose participants came from all over the world. The stumbling block to this argument was that no British powers had expressed any interest in pursuing Sarao, raising the likelihood that, if his extradition were to be blocked, the trader would escape prosecution altogether. ‘It was American individuals, American companies and the American market integrity as a whole that suffered,’ said US government barrister Mark Summers.
SEVEN WEEKS after the hearing, on 23 March 2016, the judge approved Sarao’s extradition. ‘I note this case has attracted much publicity under the banner headlines of involvement in the Flash Crash,’ he wrote, but ‘complaint of involvement in this emotively named event is but a small part of the conduct alleged here.’ On the subject of dual criminality, he found that ‘ “representations” are made by making orders/contracts’, and said that ‘the prosecution can show the motivation for this fact given the heavily modified software’. He also said there were good grounds to conclude that the United States was ‘both the desirable and practicable venue’ for a trial, adding: ‘Navinder Sarao self-evidently and understandably does not wish or desire to be extradited. Few do.’ Nav’s lawyers waited a few days before lodging an appeal with the High Court, the last remaining shot at a reprieve.
Despite the gravity of his situation, Nav seemed constitutionally unwilling or unable to be laid low by the passage of events. When some trading pals bumped into him that summer, he told them: ‘At the minute they’re winning everything. But once I go to trial and start putting out the real statistics it’s going to look different.’ Asked how he stayed so upbeat, Nav replied: ‘You don’t know what’s going to happen tomorrow. I could win my case, walk out the court, and get hit by a car.’ This Zen-like attitude extended to how he was perceived by others. ‘You cannot control what people think about you,’ he said. ‘That’s something I learned in prison. They tried to make the whole world hate me, but if your happiness is dependent on what other people think then you’ll always be unhappy.’
Nav seemed to relish the opportunity to unburden himself, and the conversation ended up lasting more than two hours. As they prepared to part ways, he reflected on his journey and the decisions he’d made. ‘All I wanted is to be the best I could be,’ he said, unlocking his Lambo from a lamppost. ‘As long as I reach my own potential, why does it matter what everyone else is doing? That’s how I broke the barriers. But I was on the hamster wheel for too long.’ Nav said he’d always planned on giving money away to charity, and felt annoyed at himself for having ‘delusions of grandeur’. ‘When I went to prison that was the one thing I was upset about,’ he said. ‘All this money I had and I basically haven’t helped anyone out. But I loved doing it too much and it was difficult to get away from it.’
CHAPTER 24
COME TO JESUS
In August 2016, the German business magazine Brand Eins published an article with the headline ‘Bezahlt wurde noch nicht’, or ‘It hasn’t been paid yet’. Its author was an investigative reporter named Ingo Malcher who had noticed the hype in Zurich surrounding Alejandro Garcia and decided to do some digging.
Malcher’s piece began in a lawyer’s office in 2007, where a then-thirty-year-old Garcia had shown up with a few sheets of paper and a translator, looking for help setting up his own bank. His partners at the time, according to the paperwork, included an Iranian entity and a businessman from Florida named Burton Greenberg. The details were vague – when asked for a name, Garcia said he wanted to call it ‘My Bank’ – and the discussion didn’t go anywhere, but six years later the lawyer was flicking through the Swiss newspaper Neue Zürcher Zeitung am Sonntag and was surprised to see a picture of Garcia atop a profile describing him as the heir to one of Latin America’s biggest agricultural families. After that, Malcher noted, Garcia was all over the press, taking about lithium and gold one minute, cattle and quinoa the next and, in December 2014, announcing his plan to acquire Arner Bank. Like IXE’s investors, journalists seemed intoxicated by this swashbuckling magnate from faraway climes, and, with every article, estimates of his family’s worth climbed higher. Garcia maintained that IXE was a multibillion-dollar company, but there were no public accounts, and Malcher set about holding his claims up to the light.
One of the first things the journalist discovered was that Garcia’s partner in ‘My Bank’, Greenberg, was a convicted felon who, along with his wife and son, was implicated in a string of audacious investment frauds. Greenberg, who was seventy-five, had been imprisoned just that year, in February 2016, for scamming pensioners out of $10 million. But it was an earlier con involving the Central Bank of Mongolia that really caught Malcher’s eye. In 2005, the government of Mongolia, an impoverished country where temperatures routinely fall below minus-forty degrees Celsius, was struggling to raise $1 billion for badly needed public housing when its officials were introduced to some Western financiers who said they could assist, according to a complaint filed in Florida in 2010 by the central bank. Greenberg and his associates boasted of connections to the world’s foremost banks and asset managers, and they told the Mongolians that, if the government could issue $200 million of ‘letters of credit’ as collateral – essentially legally binding IOUs – they would be able to come up with the funds. The gang promised to return the instruments, untouched, at maturity; but as soon as they had the documents in their possession, records show, they began trying to find financial institutions willing to cash them out early for a heavy discount. By the time the Mongolian officials cottoned on to what was happening, the offenders had managed to extract $23 million. They had attempted similar schemes in Laos, Burundi and Guinea.
Malcher had found the same legal filing that emerged around the time Nav was first considering investing in IXE, and which the company had worked hard to downplay. As IXE emphasised at the time, Garcia was never a defendant himself. Unlike the other parties, he resided outside the United States. However, the complaint alleged that Garcia ‘unlawfully, knowingly and intentionally’ participated in the enterprise, attending meetings with the Mongolians in Zurich, using his contacts and entities in the Middle East to liquidate the letters of credit, and ‘lining his pockets’ with at least $3 million. Garcia declined to comment to Brand Eins on his ties to Greenburg or the other details contained within the complaint, but i
n September 2010, Greenberg and the rest of the defendants were found guilty and ordered to pay $67 million to the Mongolian central bank, triple the alleged damages.
Spurred on by these findings, Malcher started looking into some of Garcia’s other purported business interests. In media interviews and correspondence with potential investors, Garcia claimed he had secured the exclusive right to grow quinoa on 2.1 million hectares of prime land in Bolivia. However, when Malcher contacted the country’s Ministry of Agriculture about the deal, he was told they knew nothing about it. Malcher also spoke to Edgar Soliz, head of the International Quinoa Centre in La Paz, who informed him that 95 per cent of the country’s quinoa acreage was in the hands of communities and cooperatives. Bolivia is a socialist country, and it would be virtually impossible for a private foreign entity to come along and buy that much land, Soliz said. The idea that IXE could produce 2.1 million hectares of quinoa was ‘crazy’, he added, considering the country’s entire output in 2013 was 170,000 hectares.
Malcher found the same story when he asked around about lithium. Garcia had recently started telling reporters and investors that IXE had set up a joint venture with the Bolivian state to extract lithium from the vast salt plains of the Uyuni region. In one article, he appeared dressed in a poncho with his arm cast out across the saline wilderness he claimed to control. But the country has strict laws prohibiting foreigners from extracting or exporting the element, and the head of the National Board of Salt Rocks described Garcia’s claims as ‘impossible’. Another anecdote Garcia liked to tell was how he’d grown up tending to the family’s extensive farmlands in Mexico by his father’s side. Yet Mexico’s Association of Agricultural Producers told Malcher it had no record of any Garcia Alvarezes owning notable holdings. In fact, the only plot belonging to the family that the reporter did manage to track down was 113 acres of mostly potato fields in Florida. Even Garcia’s CV didn’t check out. In 2007, he’d told the Zurich lawyer that he had an MBA from the University of Texas, but on IXE’s website it said his master’s was from the Federico Villarreal National University in Peru. When Malcher asked Garcia about this and the other discrepancies he’d discovered, Garcia declined to comment.
