TAMING OF THE HOUND OF HOUNSLOW
He’s the brilliant ‘savant’ who cheated Wall Street from a bedroom in his parents’ West London home – and made £45m. Now, on the day he’s sentenced, the gripping story of how he turned whistleblower to expose rampant financial fraud
BEHIND the drawn curtains of a first-floor bedroom in a nondescript semi-detached house in a West London suburb sits a man by the name of Navinder Sarao.
He’s 41 and has lived there with his parents since the age of three. But despite the passage of time, the room where he spends most of his life has barely changed at all.
On the bed there’s a stuffed tiger and other cuddly toys, while shelves bow beneath the weight of his collection of video games. Most are football-related and on the wall there hangs a framed shirt belonging to the sport’s most famous current player.
On its fabric four words have been scrawled: ‘To Nav, Lionel Messi.’
There’s a story behind that shirt and an even bigger one behind the computer on his desk beside his Xbox games console. Because it was from this room and using that computer that Sarao would earn himself £45 million trading on the markets, a feat that saw him dubbed The Hound Of Hounslow, a play on the nickname given to the legendary Wall Street trader immortalised by Leonardo DiCaprio in the Hollywood movie The Wolf Of Wall Street.
Not that anyone passing Sarao in the street would have had him down as a high-roller.
Sarao wore tracksuits and saved money by only buying sandwiches late in the afternoon when there was a chance they might have been discounted.
His most expensive purchase? A secondhand VW car for £5,000. And he didn’t have
He was motivated by an ‘obsessive desire’ to excel
that for long. Driving along a London route he was confronted by a ‘road closed’ sign. Instead of turning around he simply got out of the vehicle and abandoned it, never to return and never to drive again.
Because Sarao, the youngest of three sons born to Sikh parents, was different.
Although he would not be diagnosed until later in life, he was severely autistic. As one psychologist would observe, it would prove to be ‘both a talent . . . and a disability’.
Sarao mastered his times tables aged three, excelled at maths at school and studied computer science at Brunel University, where he first started to trade. It was something he excelled at.
Described by some as a ‘ savant’, he possessed the ability to instantly recognise and process complex, ever-changing data patterns. It meant he could mentally create and store charts detailing a market’s microsecond to microsecond price fluctuations over periods stretching back years. Harnessing this skill made Sarao very, very rich.
For him, playing the markets was like a game. At first he did it according to the rules. But when he noticed others bending the rules — rules which regulators failed to enforce — he started to manipulate the markets to his benefit.
But Sarao did it better — so well, in fact, that he would find himself accused of inadvertently triggering the so-called 2010 ‘flash crash’, when a trillion dollars was temporarily wiped off U.S. markets.
Eventually identified by the authorities, in 2015 he was arrested and extradited to America where, in 2016, he admitted his guilt.
But Sarao’s story does not end there. Because what happened next is almost as incredible as what happened before and can be told here in full for the first time.
Bailed back to Britain, details have now emerged of how Sarao turned whistleblower and spent the past four years helping the U.S. authorities track other scammers.
He has been so co-operative that ahead of him finally being sentenced today, prosecutors have taken the extraordinary step of asking the judge to rip up sentencing guidelines that should see him jailed for up to eight years and let him go free.
They are even willing to overlook the fact that he has not paid back all the $12.8 million he is deemed to have fraudulently earned. The reason? Unworldly Sarao was, himself, conned out of nearly all the money he made. Meaning that, today, he’s back in that bedroom, playing on his computer. But this time it’s FIFA football, not the markets. And he’s living on benefits, not dreaming of his first billion.
It was at 2.32pm on May 6, 2010 that stock indices in the U.S. fell off a cliff.
In minutes, the markets lost almost a trillion dollars in trading. Although the falls would quickly be reversed, experts would
His costliest buy? A VW car for £5,000
describe the crash as ‘one of the most turbulent periods in the history of financial markets’.
It would be five years before
Sarao would be arrested, but when he was, the U.S. authorities made it clear they believed he was at least in part to blame.
‘ His conduct was at least significantly responsible for the order imbalance that in turn was one of the conditions that led to the Flash Crash,’ said Aitan Goelman, director of enforcement at the US Commodity Futures Trading Commission.
Over a five-year period prior to his arrest, Sarao was accused of manipulating the price of the E-mini S&P 500, one of the most popular financial markets, which includes household names such as Amazon, Boeing and Bank of America.
He did this by ‘ spoofing’ or conning the markets by placing false trades. It worked like this:
Manually, and using computer software, he would place thousands of orders to buy or sell a particular share or market. This would create a false impression of supply and demand and drive prices up or down. But, at the last second, he would cancel the ‘spoof’ trades.
By then other traders had seen the movements, reacted and placed genuine orders. Having predicted this market reaction, Sarao would take advantage of the artificially lower or higher prices by going through with a handful of genuine trades.
These interactions took place within milliseconds. On one day in April 2010, he was alleged to have
placed £2 million of orders, then modified them 1,967 times to stay ahead of the market, before cancelling them. He is said to have repeated the technique 60 times that day, earning £550,000.
In total, Sarao was accused of benefiting to the tune of $12.8 million.
Once arrested, he was held in prison in the UK for four months before being extradited. After pleading guilty to wire fraud and spoofing charges, he was allowed back to Britain on bail.
He is finally due to be sentenced in Chicago today, but ahead of the hearing both the prosecution and defence have lodged lengthy submissions with the court.
Unusually, both sides agree
Sarao should not be jailed, and the time he served waiting for extradition is sufficient punishment.
For starters, they argue, Sarao only started to spoof trades after numerous complaints to the authorities went ignored.
‘ He would identify the fraudulent sequences he observed by time, price and order size,’ writes Sarao’s lawyer, Roger Burlingame.
‘Weeks later, when calling back to complain some more, he would be told that the [regulators] had looked at the sequence or sequences he had previously identified and did not see anything wrong. This process repeated itself over and over again for months, with Nav calling once or twice a week. Nav could not understand how they could say that what he was seeing happen every day, day after day, was not a problem.’ On the basis of ‘if you can’t beat them, join them’ Sarao decided to do just that. In a letter to the court, Professor Simon BaronCohen, Britain’s leading authority on autism, says this was ‘wholly consistent with, and a consequence of, his autism’. ‘ He was “playing the game” according to the rules he saw other traders were using, which included “spoofing”,’ writes BaronCohen, cousin of actor Sacha Baron-Cohen. ‘When he complained to the regulators about this behaviour and it continued, this would have enforced that these were the rules of the game.’ Given Sarao’s abilities — he had already made tens of millions trading legally — once he started spoofing he was always going to do it better than anyone else. Nonetheless, it was accepted by the prosecution that ‘ the defendant clearly was not motivated by money, greed, or any desire for a lavish lifestyle… he did not seem to care about any of that money, and did not use it to live anything approaching an extravagant lifestyle’. His motivation? An ‘obsessive or addictive desire’ to excel at electronic trading. Following his arrest, the U.S. authorities ordered that Sarao hand over the $12.8 million he had made spoofing. Within days of his guilty plea, Sarao produced $7.6 million. It was everything he had left. So what happened to the rest? Incredibly, it was all lost — swallowed in three catastrophic ‘investments’. Encouraged by a former colleague to put his money to work, Sarao had been introduced to two ‘ supposed’ investment advisers who started off by charging him £2 million in commission. According to court papers, £25 million was duly placed with a commodities trading company called IXE Asset Management on the promise of 11 per cent quarterly interest. A further £11.5 million was invested with Cranwood Holdings Limited, an Isle of Man company, which claimed it would develop a windfarm and produce profits of up to £400 million. A third company, Iconic Worldwide Gaming Limited, obtained £2.35 million of Sarao’s money promising a 20-fold return once they had developed an online betting portal. ‘Nav lost all this money,’ says Burlingame. He adds: ‘It has since been widely reported that IXE’s founder is a con artist and IXE was a Ponzi scheme. Nav’s Cranwood investment was spent on salaries for the CEO and a number of his family members (who possessed no relevant experience), without securing a single site on which it could build a windmill.
‘Similarly, the CEO of Iconic Worldwide Gaming spent lavishly on himself before the company went into liquidation.’
Sarao, it is claimed, was so easily parted from these sums of money because of his autism, which left him with ‘severe social limitations’ and vulnerable to trickery.
Which brings us to the shirt of Barcelona star Lionel Messi — a gift on a night out from the man behind the betting company in whom he had already invested £2.35 million.
‘Nav was impressed by the jersey, thinking it demonstrated superior connections in the sporting world,’ wrote Burlingame.
‘He also felt the man was his friend and could be trusted. Thus, when the man ended the evening by asking for an additional £1 million loan in order to exploit the patents he claimed to have acquired, Nav readily agreed to provide it. Soon after, the man stopped returning Nav’s calls.’
Burlingame also explained that when it was clear the money was gone, Sarao allowed himself to acknowledge the writing on the jersey that says ‘To Nav’ was in an obviously different hand from Messi’s signature, which he believes is genuine (signed jerseys can be purchased in memorabilia stores.)
Sarao was swindled of £3.35 million but the shirt still hangs in his bedroom. When asked why, he
Prosecutors don’t want him jailed
explains: ‘It’s still a signed framed shirt off the best player in history. It’s still a nice item, innit?’
While the loss of these funds meant Sarao could not fully meet the forfeiture order imposed by the U.S. authorities, what he could do was to co-operate with them.
‘The defendant’s co- operation has spanned years and has been extraordinarily timely, complete, truthful, and helpful to the government,’ said Robert Zink, chief of the U.S. Department of Justice’s fraud section, in his court submission.
This help took the form of Sarao explaining what he had done by talking through videos of screens filmed while he was trading. Not only did they record his own illegal spoofing activities, but the activities of others doing the same.
Last year, he also flew to America to give evidence against Jitesh Thakkar, boss of a company accused of creating software to help him commit spoofing. Although the case against Thakkar collapsed, prosecutors say Sarao’s involvement had been crucial.
They also noted that away from home and while giving evidence, his health quickly deteriorated. He had trouble sleeping for more than an hour a night, and became unwell, a consequence of his autism and something that happened while he was held on remand in the UK.
With little chance of Sarao offending again, Zink concluded that ‘ additional incarceration would also pose no benefit to him or to society’.
If the judge agrees, it means Sarao will be allowed to return to the anonymity his lawyer says he craves. The final chapter in an extraordinary story of rags to riches, and back again.