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How The Flash Crash Trader Was Scammed Out Of A $50 Million Fortune

Friday, February 10, 2017 14:48
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(Before It's News)

The sad saga of Navinder Sarao, who on April 20, 2015 became the scapegoat for the May 2010 flash crash and was sentenced to up to 360 years in prison – he will find out later this year the actual length of his prison sentence – got its latest twist today thanks to a fascinating report how in addition to having lost his freedom, Nav also lost all of trading fortune, some $50 million of it.

As Bloomberg’s Liam Vaughn recounts, “it took Navinder Singh Sarao a long time to accept that he might have been scammed out of $50 million. Stuck in London’s Wandsworth prison, wracked with anxiety and unable to sleep, the realization dawned on the man dubbed the “Flash Crash Trader” as slowly as spring turned to summer outside the barred window of his jail cell.”

Regular readers are familiar with the background story: according to the U.S. government, the British day trader had made tens of millions of dollars using an illegal practice called spoofing, including on May 6, 2010, when the Dow Jones Industrial Average fell almost 1,000 points in minutes before bouncing back. The extent of Sarao’s culpability for the flash crash is fiercely contested, but the incident exposed the shaky foundations on which the hyper-fast, computer-dominated financial markets now rest, and we this website warned about since its inception in 2009.

Then, in November of last year, following an unsuccessful extradition fight, Sarao flew to Chicago where he pleaded guilty to one count of wire fraud and one of spoofing. He was ordered to pay $38.4 million to the CFTC and the Justice Department, which determined that, of the money he made by day trading, only $12.8 million came from cheating the market.

That much is known, what is less known is what happened after.

When Sarao’s bail was set at 5.05 million pounds ($6.3 million), Vaugh writes, few were surprised. “It was a hefty sum, but according to the accounts of his company, Nav Sarao Futures Limited, he’d earned 30 million pounds in the previous five years. Newspaper reports, in which Sarao was dubbed “The Hound of Hounslow,” speculated that he’d be back with his family in the shabby West London borough by the weekend. Instead, the nightmare got worse.”

“Where’s the money, Nav, his lawyers wanted to know.”

As it turns out, Sarao couldn’t make bail, “because the bulk of his wealth was tied up in investments and offshore trusts, each more complicated than the last.” And after four months of dead ends, in which Sarao remained locked up among sexual predators and violent offedners at Wandsworth prison, his legal team struck a deal with the authorities: If the U.S. Justice Department and the Commodity Futures Trading Commission agreed not to oppose a reduction in bail to 50,000 pounds, the firm would act as a bounty hunter, taking on responsibility for tracking down the missing millions on the condition that its fees be paid if it did.

What they found is that virtually all of Sarao’s money, some $50 million, was gone. Sadly, the infamous trader was a better spoofer, than investor.

A review of Sarao’s investments from 2005 to the present day, based on dozens of interviews and thousands of pages of documents, reveals another twist in an already remarkable story. Navinder Sarao, the trading savant accused of sabotaging the world’s financial markets from his bedroom, may himself have been the naïve victim of what his lawyers portray as a series of cons that stripped him of almost every cent he earned.

Making the money was not the problem. When Sarao left his last employer, Futex, in 2008 and struck out on his own, he started to make serious money, most of through spoofing. Public filings show his assets popped to 14.9 million pounds from 461,000 pounds in the 12 months ending in June 2009, long before he enlisted a programmer to build a system that authorities say was designed to cheat the market. By 2011, Sarao had trebled his assets to 42.5 million pounds.

As the money grew, Sarao felt the urge to engage various shady, and as it would subsequently emerge, criminal tax advisors, to help him preserve as much of the trading profits tax free. Predictably, it was here that the problems emerged.

Bloomberg then recounts where Sarao’s the money went. First, a company called IXE.

  • Sometime in 2012, Sarao was introduced to a squat, intense Mexican named Jesus Alejandro Garcia Alvarez, who was looking for investors for his company IXE Group. Garcia said he was the scion of a family of billionaire landowners and industrial-scale farmers with swaths of land around the world. He had arrived in Zurich from Latin America a few years earlier and had been working hard to build a reputation ever since.  IXE was conceived as a one-stop shop for high-net-worth individuals, offering services ranging from asset management to event planning to advice on private schools.
  • Then, around the time Sarao met Garcia, the company’s website underwent a radical overhaul. Gone were the concierge services. IXE was henceforth a “conglomerate of companies worldwide” involved in “agribusiness, wealth management, commodity trading and venture capital.”  Garcia was invited on Bloomberg TV to talk about his family’s quinoa interests, then on CNBC to discuss the “white gold rush” for lithium. Sarao did some due diligence about IXE, according to one adviser, but he seems to have overlooked a few red flags: The company website is littered with spelling mistakes, and several executives are members of Garcia’s family.
  • Garcia had all the trappings of a successful entrepreneur: half a dozen sports cars, a small but well-appointed office in the center of Zurich, a glamorous Russian wife. He even joined the Swiss board of the Robert F. Kennedy Center for Justice & Human Rights, an organization whose U.S. directors include Tim Cook and Martin Sheen.
  • Garcia told Sarao he would get an annual 11 percent return, the people said, and assured Sarao that any money he handed over would be used only as collateral, not put at risk.
  • On Aug. 20, 2012, documents show, Sarao agreed to give about $17 million to Garcia and his company—by far his biggest investment and a substantial chunk of his net worth. He later invested an additional $15 million, according to a person with knowledge of the matter. Even though they’d met on only a handful of occasions, he would describe Garcia to associates as a friend.

Sarao’s next major investment was in Iconic Worldwide Gaming. a company which allowed gamblers to bet on movements 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. The company predicted in the pitch document that Iconic would go from a standing start to a cash balance of 110 million pounds by the end of its third year. There were also some reassuring names on the board: Robin Jacob, a U.K. appeals court judge, and David Michels, a former deputy chairman of Marks & Spencer.

  • In July 2014, documents show, Sarao invested 2.2 million pounds in Iconic. Cranwood Holdings extended loans of an additional 1 million pounds, according to one Sarao adviser. He was, several times over, the largest investor in the company.
  • In the months following Sarao’s investment, O’Brien went on a campaign to increase Iconic’s profile. The company sponsored World Touring Car Championship driver Rob Huff and filmed a slick advertisement with mixed martial arts superstar Conor McGregor. O’Brien and his employees were photographed ringside or wining and dining clients. In one shot taken in Las Vegas and posted on Twitter, a line of promo girls posed in matching uniforms with Iconic logos emblazoned on their hot pants. In another, O’Brien stood next to a matte-black Rolls-Royce with the license plate DAMI3N.

His third investment was in an Isle of Man-based entity called Cranwood Holdings, set up to acquire land in Scotland that would one day house wind farms, according to two advisers to Sarao.

  • Documents on the enterprise filed in the British dependency are light on detail, but the advisers say Sarao put about 12 million pounds in Cranwood.
  • Dupont and MacKinnon said in their e-mail that Sarao conducted “substantial independent due diligence” before investing in Cranwood and that he approved all of its payments. One of their companies, Wind Energy Scotland, is funded by and provides project management services to Cranwood.

Unfortunately, none of these paid out.

By the time Sarao was arrested in April 2015, he had about $50 million tied up in investments around the world, according to people with knowledge of the matter who even now aren’t positive it’s all accounted for. It was only as his lawyers tried to recoup the money that he was forced to face up to the possibility that it was gone. Sarao was released that August after his parents put up the family home as collateral against the bail of 50,000 pounds. Sarao’s lawyers are no closer to getting their hands on the money beyond about 5 million pounds seized from his trading accounts after his arrest. The CFTC and the Justice Department have joined them in the hunt.

Ultimately, every Sarao investment ended up being either a ponzi scheme, a fraud, or a simple bankruptcy.

  • IXE told Sarao it would return the cash in installments in 2015 and 2016, according to a person familiar with the matter. “The deadlines came and went, but no money has been produced. Former IXE employees interviewed by Bloomberg say that Garcia spent whatever he brought in to fund his own lavish lifestyle.” Garcia hasn’t been accused of any wrongdoing. Forcucci, the IXE spokesman, said the company is “working to return the money in a fair and equitable manner to its investors.”
  • Iconic went into liquidation in January 2016. A company hired to advise it on resale options said O’Brien had underestimated the cost of breaking into the online gaming market by about 10 million pounds.
  • Sarao’s lawyers have been unable to retrieve his investments in Cranwood despite repeated requests, owing to its convoluted offshore ownership structure.

Meanwhile, as Vaugh concludes, “Sarao is back in his bedroom. The computer that got him into so much trouble is gathering dust in a Washington evidence room. Depending on how much the authorities are able to recoup, he will probably spend the rest of his life paying back the money he owes. If they really want it, they could always lift the trading ban, one associate quips: He’d make it back in no time.”

Sadly for Sarao, who was caught in the middle of an HFT fight that demanded a sacrifice, that will never happen. Now if only Nav had spent his money it as it came in…

There is much more in he full Bloomberg story.



Source: http://silveristhenew.com/2017/02/10/how-the-flash-crash-trader-was-scammed-out-of-a-50-million-fortune/

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