WSJ17Jun2015txt

By MARGOT PATRICK

June 17, 2015

LONDON — When British trader Navinder Singh Sarao planned to raise money to launch a new investment fund in 2010, he was put in touch with David Cosgrove, an Irishman who had set up dozens of such funds in offshore tax havens.

The NAV Sarao Milking Markets Fund (GBP) was soon registered in Mauritius as part of Mr. Cosgrove’s financial network. The stuccoed Hounslow, England, home where Mr. Sarao traded U.S. and European stock futures became a new outpost in a growing empire of funds overseen by Mr. Cosgrove.

Five years later, Mr. Sarao is in a London prison, charged by U.S. authorities with market manipulation that contributed to the U.S. stock-market “flash crash” of 2010. Meanwhile, regulators in Mauritius and Guernsey shut down Mr. Cosgrove’s network of funds this year and are investigating the funds’ oversight and valuation.

A lawyer for Mr. Sarao, who denies the U.S. criminal and civil charges, declined to comment on the fund. Its existence and connection to Mr. Cosgrove hasn’t previously been reported. Mr. Cosgrove said he’s working with regulators on their investigations and denies any wrongdoing.

The intersection of the two men’s paths casts a light on a murky, offshore marketplace connecting unsophisticated investors with lightly-regulated offshore funds. It also illuminates the far-flung business activities of Mr. Sarao, who has taken on folk hero status among supporters who view him as a scapegoat for the 2010 crash.

Funds established through companies controlled by Mr. Cosgrove and his South African business partner, Jacobus Kellermann, raised hundreds of millions of dollars from retirees and expatriates living in Asia, South America and the Middle East, usually via financial advisers who collected big commissions to steer clients into the funds, according to marketing documents for the funds and people involved in the sales. Mr. Kellermann also said he’s working with regulators and denies any wrongdoing.

At the heart of the operation was Belvedere Management Ltd., a Mauritian company owned by Messrs. Cosgrove and Kellermann that provided the funds with back-office services. Related companies owned by the two men also helped to manage some of the funds’ investments, which ranged from pools of other funds to European penny stocks, exotic hardwood plantations and rare earth metals.

After complaints from some fund investors over losses, authorities in at least five countries suspended or took enforcement action against funds linked to Mr. Cosgrove and his group this year, according to public statements by the authorities. All of the Mauritius and Guernsey funds were taken over by regulators this spring.

A spokesman for the Mauritius regulator said it is still investigating the funds and working with global counterparts. A spokesman for the Guernsey regulator said the matters remain ongoing.

U.S. authorities say that Mr. Sarao’s trading strategy, allegedly entering and canceling orders in futures contracts to artificially move their prices, involved an illegal technique known as “spoofing.” Such trades by Mr. Sarao on May 6, 2010 contributed to a sharp fall in stocks, the U.S. authorities allege. Before his April arrest, the process earned Mr. Sarao at least $40 million, according to the U.S. complaints against him. To store the growing wealth, Mr. Sarao set up a network of offshore companies, the U.S. complaints say.

How Mr. Sarao originally got connected to Mr. Cosgrove’s group to set up the fund is contested.

Through a spokesman, Mr. Cosgrove said a business associate, Nigel Green, first approached him at a meeting in Switzerland in the spring of 2010 about working with a fund linked to Mr. Sarao’s trading strategy. Mr. Green again brought up the fund at a subsequent meeting in London, Mr. Cosgrove said.

Mr. Green said he doesn’t recall any conversations about Mr. Sarao. He said in an interview that he doesn’t know Mr. Sarao, although “I can’t be 100% sure.” Through a spokesman Mr. Green later said he didn’t have any business dealings with Mr. Sarao but had possibly met him through one of his “many public speaking engagements” as head of a financial consultancy.

To unknown traders like Mr. Sarao, Mr. Cosgrove’s appeal was that he could offer investment managers a fast track to regulatory approval by bolting on their funds to existing vehicles he ran that were already authorized in Mauritius or Guernsey.

The practice, known as “white labeling” or “private labeling,” gives new or unproven investment managers a way to bypass startup obstacles or create tailor-made products for certain clients, companies providing the service say. For offshore financial centers, the structure has been a big growth area in recent years, encompassing thousands of funds.

On July 19, 2010, the NAV Sarao Milking Markets Fund was registered in Mauritius as part of an umbrella fund running two dozen other strategies, with Mr. Cosgrove as a director. Mr. Sarao three months earlier registered a vehicle with a similar name in the Caribbean island of Nevis.

At the time, “there was no controversy around this individual,” Mr. Cosgrove said. He said the fund never operated or had outside investors after being set up, so was eventually turned over to another investment manager and renamed.

Mr. Sarao is fighting an extradition request from the U.S. and has been unable to post the £5 million ($7.8 million) bail set by a London court because of a global freezing order on his assets imposed by the U.S.