'Flash crash' market manipulation case poses test for prosecutors

Tue Apr 21, 2015 7:45pm EDT
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By David Ingram

NEW YORK (Reuters) - Charges against a high-frequency trader for helping to spark the 2010 "flash crash" present a test of U.S. prosecutors' ability to win a big market manipulation case and may make other traders nervous they may be next, lawyers said on Tuesday.

The charges against Navinder Singh Sarao, 36, drew reactions of astonishment from securities lawyers interviewed by Reuters because criminal charges for market manipulation are so rare.

Sarao was arrested in the United Kingdom, after being charged in U.S. District Court in Chicago with fraud and manipulation. Authorities said he traded from his UK home using tactics such as "layering" and "spoofing," which traders use to place orders that they cancel before they are executed to create the false impression of demand.

The U.S. Justice Department said it is requesting his extradition. There was no answer at Sarao's house in the London suburb of Hounslow on Tuesday. British police said he will appear at a London court on Wednesday. The U.S. Commodity Futures Trading Commission filed related civil charges.

Although regulators frequently bring civil cases for alleged manipulation, especially in the world of penny stocks, proving a criminal case is much more difficult, the lawyers said. Prosecutors need to show that a trader such as Sarao intended to artificially influence prices rather than trade legitimately, and they need unanimous support from a jury to win their case.

To show intent, prosecutors will likely point to trading patterns to try to show Sarao never intended to fulfill his trades, or they may use documentary evidence such as emails if they have it, the lawyers said.

Prosecutors' decision to charge Sarao indicates they think they can meet the higher burden in his case, said Jonathan Macey, a professor at Yale Law School. "The most amazing thing is that it's a criminal charge," he said.

The case marks the first time U.S. regulators have alleged that market manipulation played a role in the flash crash, in which the Dow Jones Industrial Average plunged more than 1,000 points before recovering somewhat toward the end of trading.   Continued...

The sun sets on the address where Nav Sarao Futures Limited is registered, in Hounslow, London April 21, 2015. REUTERS/Neil Hall