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Feds say British trader who set off ‘flash crash’ stock plunge should get reduced sentence for cooperation, health concerns

Chicago Tribune - 1/28/2020

Ten years ago, trading futures from his parents’ suburban London home, Navinder Sarao shook up the investment world when his computer program set off the so-called “flash crash," causing the stock market to temporarily lose a trillion dollars in a matter of minutes before recovering.

Diagnosed as a mathematical savant with social disabilities from Asperger’s syndrome, Sarao will learn Tuesday if he has to trade his childhood bedroom for a federal prison cell during sentencing in Chicago federal court.

Worth millions at his peak, and now living on government aid in England, Sarao was an unlikely wolf of Wall Street, with a “childlike, guileless” demeanor and a wealth of quirks that made his massive and illicit disruption of financial markets all the more remarkable, according to his attorneys’ sentencing memorandum, filed last week.

Taking on the world’s most sophisticated futures traders from a bedroom filled with stuffed animals, video games and sports memorabilia, Sarao devised his own method to “spoof” the market and generate millions of dollars in ill-gotten gains, while keeping his success a secret for years -- until he was caught.

Sarao, 41, pleaded guilty in 2016 to a five-year fraudulent trading scheme and faces up to 30 years in federal prison.

Prosecutors are recommending his sentence be reduced to time already served -- four months in a London prison -- both because of his “extraordinary” cooperation with federal authorities, and concerns over his Asperger’s condition, which was diagnosed after his 2015 arrest and proved debilitating during his brief incarceration.

“Additional incarceration beyond the time he has already served would pose particularly severe challenges for the defendant,” prosecutors said in a sentencing memorandum.

Sarao still lives in his childhood bedroom and having forfeited his gains, is dependent on his parents and government benefits. He spends his days feeding birds, riding his bicycle and playing video games, his attorneys said.

Using a variety of computer programs, Sarao made $70 million trading financial instruments called E-Mini S&P 500 futures through the CME. He was engaged in a fraudulent technique known as “spoofing,” which uses electronic high-speed computer trading to flood the market with bogus large orders, triggering short-term price movements. The false orders are canceled before they are filled, while the trader takes advantage of the artificial price blip.

On May 6, 2010, Sarao’s program inadvertently set off the flash crash, temporarily roiling financial markets, regulators said. With market volatility high and broader negative sentiments over the European debt crisis, Sarao flooded the market throughout the morning with spoof orders, creating a major sell side imbalance for the E-Mini.

At 2:32 p.m. Eastern time, against the backdrop of high volatility and thinning liquidity, an institutional investor initiated a program to sell a total of 75,000 E-Mini contracts valued at $4.1 billion to hedge to an existing equity position. Automated high-frequency trading programs exacerbated movement and stocks spiraled downward, with equities losing a $1 trillion in valuation in about 30 minutes.

Then, just as quickly, markets recovered, regaining nearly all of the losses.

After the flash crash, Sarao refined the trading program -- in part with the help of a suburban Chicago computer programmer -- and was able to make millions over several years before his April 2015 arrest in England on charges of wire fraud, commodities fraud and spoofing. He was detained for four months in a London prison before being released on bail.

Sarao was extradited in November 2016 to the U.S., where he pleaded guilty and agreed to forfeit $12.8 million attributable to his fraud and spoofing scheme. He paid $6.9 million within 10 days of his guilty plea -- most of what remained of his illicit trading proceeds.

As part of his cooperation with federal authorities, Sarao came to Chicago in April 2019 to testify in the federal trial of Jitesh Thakkar, a computer programmer from Naperville charged with helping Sarao secure millions in illicit profits. Those charges were dropped, although Thakkar still faces a civil enforcement action.

During Sarao’s time in Chicago, the government observed how time away from home affected him. Sarao said he was unable to sleep and showed signs of “deteriorated focus” after just a few days away at a Chicago hotel -- a “far cry” from what he would experience at a detention facility, according to the government filing.

Attorneys representing Sarao went further in their own sentencing memorandum, saying he posed a “very high suicide risk” if incarcerated again.

Sarao “spends his days and nights in the same small bedroom he has lived in since he was a boy, with stuffed animals on his bed, computer games in his bookshelf, and blankets hung over the windows to try to escape the light to which he is exquisitely sensitive," his attorneys wrote.

A public benefits recipient, Sarao lives on $336 a month, yet his lifestyle is “identical" to the years when his net worth exceeded $70 million, according to the filing by his attorneys.

He lost most of his assets to three “apparently fraudulent” investment schemes, according to prosecutors.

In seeking a reduced sentence, federal prosecutors also said Sarao was “not motivated by money, greed, or any desire for a lavish lifestyle,” other than the purchase of an inexpensive car.

Sarao abandoned the used Volkswagen “soon after purchase” on a London street because he encountered a “road closed” sign on his known route home, according to his attorneys. He now travels mostly by bicycle.

Sentencing is scheduled for 1 p.m. It is unclear is Sarao will appear in person.


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