Yesterday, Michael Coscia’s criminal conviction and sentencing for spoofing was unanimously upheld by a three-judge Federal Court of Appeals panel in Chicago, Illinois.
Mr. Coscia was originally indicted and charged with six counts of spoofing in October 2015 under a new provision of law enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 that prohibits any trading, practice or conduct on a Commodity Futures Trading Commission-regulated trading facility that “is, is of the character of, or is commonly known to the trade as, ‘spoofing’ (bidding or offering with the intent to cancel the bid or offer before execution).” Mr. Coscia was also charged with six counts of commodity fraud.
Subsequently, after a seven-day trial, Mr. Coscia was convicted by a jury of all charges and sentenced to 36 months imprisonment by a Federal District Court judge.
Mr. Coscia was the first person criminally charged under the anti‑spoofing provision of Dodd-Frank.
In his appeal, Mr. Coscia claimed that the anti-spoofing law was unconstitutionally vague, or failing that, that the evidence at trial did not support his conviction. Mr. Coscia also claimed that his commodities fraud conviction was likewise not supported by the evidence at trial, and that his sentence by the District Court judge was based on an incorrect measure of the losses sustained by traders as a result of his conduct.
The Appeals Court rejected these arguments, holding that the anti‑spoofing law gave “clear notice” and did not “allow for arbitrary enforcement.” As a result, the law was not unconstitutional. In addition, the Appeals Court said that Mr. Coscia’s spoofing and commodity fraud convictions were supported by the evidence, and that the District Court’s sentencing “was on solid ground.”
The Appeals Court concluded that the meaning of “spoofing” in the relevant statute was clear and that Mr. Coscia “had adequate notice” of the prohibited conduct. This is because, said the Court, the term “spoofing” is followed in the relevant law by the express definition: “bidding or offering with the intent to cancel the bid or offer before execution.”
The Appeals Court also held that, based on presented evidence, a reasonable trier of fact could have concluded that Mr. Coscia had the requisite intent to sustain his conviction. In reaching this conclusion, the Appeals Court reviewed evidence of Mr. Coscia’s purposeful design and use of two computer-driven algorithmic trading programs (“Flash Trader” and “Quote Trader”) to repeatedly place small buy or sell orders in markets, followed by the rapid placement and retraction of multiple large orders on the opposite side of his small orders. The Appeals Court concluded that Mr. Coscia placed the large orders to deceive the market and to facilitate the execution of his small orders at artificially induced favorable prices. To reach this conclusion, the Appeals Court reviewed the large disparity between the high cancellation rate of Mr. Coscia’s large orders and the low cancellation rate of his small orders, and the testimony of Mr. Coscia’s chief programmer, who said that Mr. Coscia had expressly asked that the programs act “like a decoy” to be used to “pump [the] market.”
Although the Appeals Court conceded that no “single piece of evidence necessarily establishes spoofing” it concluded that “when evaluated in its totality, the cumulative evidence certainly allowed a rational trier of act to determine that Mr. Coscia entered his orders with the intent to cancel them before their execution.”
Finally, the Appeals Court concluded that, given the difficulty of ascertaining the cumulative loss of each trader harmed by Mr. Coscia’s trading activities, it was reasonable for the District Court to base its sentencing of Mr. Coscia on the amount of his gains as a reasonable substitute for the amount of losses incurred by his counterparties.
In holding against Mr. Coscia, the Appeals Court noted that spoofing orders are “meaningfully different” than certain other orders that are “designed to be executed upon the arrival of certain subsequent events” such as fill-or kill orders or stop-loss orders. According to the Appeals Court, “[t]he fundamental difference is that legal trades are cancelled only following a condition subsequent to placing the order whereas orders placed in a spoofing scheme are never intended to be filled at all.”
The Appeals Court also rejected the claim by Mr. Coscia that the anti-spoofing provision was unconstitutional because of an “allegedly arbitrary enforcement that could hypothetically be suffered by a theoretical legitimate trader.” This is because, said the Appeals Court, Mr. Coscia’s trading clearly fell within the prohibited conduct expressly proscribed by the statute.
Mr. Coscia’s indictment alleged that, in connection with his unlawful activity, he traded 17 different CME Group products and three different ICE Futures Europe products, including gold, foreign exchange and soybean oil futures contracts, from August through October 2011. Mr. Coscia made over US $1.4 million as a result of his trading activity, claimed the indictment.
Previously, in July 2013, Mr. Coscia settled civil actions related to the same conduct underlying his criminal indictment with the CFTC, the UK Financial Conduct Authority and CME Group exchanges by payments of aggregate fines of approximately US $3.1 million, disgorgement of profits and a one-year trading suspension.
(Click here for details of Mr. Coscia’s conviction and sentencing in the article “Michael Coscia Sentenced to Three Years’ Imprisonment for Spoofing and Commodity Fraud” in the July 17, 2016 edition of Bridging the Week. Click here for details of Mr. Coscia's civil settlements in the article “CFTC, UK FCA and CME Group Exchanges File Charges and Settle with Proprietary Trading Company and Principal for Spoofing in the July 22, 2013 edition of Between Bridges.)
In November 2016, Navinder Singh Sarao pleaded guilty in a US federal court in Chicago to criminal charges previously brought against him by the Department of Justice for allegedly engaging in manipulative conduct through spoofing-type activity involving E-mini S&P futures contracts traded on the Chicago Mercantile Exchange between April 2010 and April. 2015, including illicit trading that contributed to the May 6, 2010, so-called “Flash Crash.” On the same day, the CFTC announced that Mr. Sarao settled civil charges it had brought against him and Nav Sarao Futures Limited PLC, a company he controlled, related to the same essential conduct. Mr. Sarao – the second person criminally charged under Dodd Frank's anti-spoofing provision – currently awaits sentencing in his criminal action. (Click here for details in the article, "Alleged Flash Crash Spoofer Pleads Guilty to Criminal Charges and Agrees to Resolve CFTC Civil Complaint by Paying Over $38.6 Million in Penalties" in the November 13, 2016 edition of Bridging the Week.)
My View: As I wrote at the time of Mr. Coscia’s indictment: “[w]hatever the merits of this action, a major policy concern is the chilling effect the knowledge of impending or likely criminal charges will have on persons eager to settle their exchange or government-driven civil enforcement matters and move on. Here, Mr. Coscia not only paid a substantial penalty for his actions, he disgorged most of his profits and agreed to trading prohibitions—thus substantially impacting his future livelihood. If the purposes of criminal sanctions are to act as a deterrent, punish individuals and encourage the rehabilitation of wrongdoers, it is not clear what the incremental benefit of imposing additional penalties in this criminal action may be. Moreover, it is also not clear how this effectively redundant legal proceeding (albeit a criminal action with the prospect of incarceration) … justifies the expenditure of limited tax dollars—other than to generate dramatic headlines. These musings are not to condone illicit conduct—which should be appropriately punished—but solely to ask: when is enough enough?” This concern is perhaps even more valid now that a Federal Court of Appeals has upheld Mr. Coscia's criminal conviction after three civil settlements.