Last week, a three-judge Federal Court of Appeals panel in Chicago unanimously upheld Michael Coscia’s criminal conviction and sentencing for spoofing. Mr. Coscia was originally indicted and charged with six counts of spoofing in October 2015 under the 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 commodities fraud. After a seven-day trial, Mr. Coscia was convicted by a jury of all charges and later sentenced to 36 months imprisonment by a Federal District Court judge. 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 other 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 the evidence supported Mr. Coscia’s spoofing and commodities fraud convictions, and that the District Court’s sentencing “was on solid ground.” Mr. Coscia was the first person criminally charged under the anti‑spoofing provision of Dodd-Frank. (Click here for a more complete discussion of this decision in the article “Federal Appeals Court Upholds Conviction and Sentencing of First Person Criminally Charged for Spoofing Under Dodd-Frank Prohibition” in the August 7, 2017 edition of Between Bridges.)

Legal Weeds: The Department of Justice has now been responsible for three criminal prosecutions relying on the Dodd-Frank anti-spoofing provision – this criminal action against Mr. Coscia; a second matter against Navinder Singh Sarao who was indicted in April 2014 and settled with the DoJ in November 2016; and a third action against David Liew in June 2017.

In both the cases against Mr. Coscia and Mr. Sarao, prosecutors were likely emboldened to initiate the criminal actions because of a seemingly straightforward path to establish intent – a necessary element to prove spoofing and other related crimes: both Mr. Coscia and Mr. Sarao apparently used software purposely designed to layer and spoof markets to facilitate fills, and both proactively participated in the design of such software. As the Court noted in its Coscia decision, the defendant’s chief programmer testified at trial that Mr. Coscia asked that the relevant trading programs act “like a decoy” to be used to “pump [the] market.” Not good.

Mr. Liew’s case involved materially different circumstances, as he appears to have been a very junior trader who allegedly was trained to spoof and traded as taught.

Existence of an easy path to demonstrate intent to cancel bids or offers before execution (including documentary evidence in the form of computer code) coupled with overwhelming evidence of such cancellations associated with layering orders (compared to a far lower cancellation rate associated with other orders) – as apparently was present in Mr. Coscia’s and Mr. Sarao’s cases – could tempt a prosecutor to initiate other criminal prosecutions alleging spoofing and related offenses. This appears possible even where there are or have been prior CFTC, exchange or even foreign civil actions involving a potential defendant for the same essential offense. Prosecutors will likely feel even more emboldened after the Federal Appeals Court decision involving Mr. Coscia.

(Click here for details regarding Mr. Sarao’s indictment and settlement 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. Click here for details regarding the criminal action against Mr. Liew in the article “Former Newbie Bank Trader Pleads Guilty to Criminal Charges and Settles CFTC Civil Charges for No Fine for Spoofing, Attempted Manipulation and Manipulation of Gold and Silver Futures” in the June 4, 2017 edition of Bridging the Week.)