Michael Coscia, the first person prosecuted and convicted under a law prohibiting spoofing that was enacted after the 2007-2008 financial crisis, was sentenced to three years’ imprisonment last week for illicit futures trading he engaged in during three months in 2011.

In July 2013, Mr. Coscia settled civil actions related to the same conduct with the Commodity Futures Trading Commission, the Financial Conduct Authority and the CME Group by payments of aggregate fines of approximately US $3.1 million; disgorgement of profits; and a one-year trading suspension. (Click here for details in the article, “CFTC, UK FCA and CME File Charges and Settle with Proprietary Trading Company and Principal for Spoofing” in the July 22, 2013 edition of Between Bridges.) Mr. Coscia was convicted of six counts of commodities fraud and six counts of spoofing for his prohibited trading activities in November 2015. (Click here for details of Mr. Coscia's conviction in the article, "Jury Convicts Michael Coscia of Commodities Fraud and Spoofing" in the November 8, 2015 edition of Bridging the Week.)

Leading up to the sentencing, the United States Attorney’s Office in Chicago had requested that the judge presiding over Mr. Coscia’s criminal trial impose the maximum sentence recommended by applicable guidelines of between 70 and 87 months in prison, while Mr. Coscia’s counsel had argued for a lesser term of between no more than 4 to 10 months’ imprisonment. (Click here for details in the article, “Government Seeks Maximum Sentence in Coscia Criminal Action" in the July 10, 2016 edition ofBridging the Weeks.) It appears likely that Mr. Coscia will appeal his conviction.

Separately, the Chicago-based federal judge hearing the CFTC’s enforcement action against a trader and his company for alleged spoofing through posting and flipping trading conduct denied the agency’s request for preliminary injunction, saying that surveillance reports and compliance tools already put in place by the defendants, as well as certain additional trading restrictions imposed by the judge herself, would restrict the defendants’ capability to engage in any potentially prohibited spoofing-type trading activities. As a result, said the judge, “a preliminary injunction is inappropriate at this time.”

Under the judge’s order, the trading firm’s chief compliance officer is obligated to file a sworn affidavit with the court every month between now and the conclusion of the relevant trial “affirming that all of [the enumerated] trading restrictions and compliance tools remain in place and that neither [of the defendants] have violated any of them.” (Click here for background on this enforcement action in the article, “CFTC Enforcement Action Introduces New Theory of Spoofing” in the October 25, 2013 edition of Bridging the Week.)

My View: It seems somewhat draconian that Mr. Coscia was sentenced to three years in prison for violating a new law for which he already paid substantial civil sanctions; which on its face appears to prohibit at least some legitimate trading practices; and which may not have given him adequate notice of prohibited conduct. Recently, in announcing its issuance of its first cross-market equities report cards aimed at helping member firms identify potential spoofing and layering activity, the Financial Industry Regulatory Authority defined spoofing as “entering orders to entice other participants to join on the same side of the market at a price at which they would not ordinarily trade, and then trading against the other market participants’ orders.” This is a comprehensive practical definition. Contrariwise, the relevant provision under which Mr. Coscia was convicted prohibits “spoofing” but defines it as “bidding or offering with the intent to cancel the bid or offer before execution.” However, many legitimate orders, including stop loss orders, are placed with the goal or hope not to have the order executed, as that would mean the value of a position is declining. Unfortunately for Mr. Coscia, the judge hearing his case did not have a problem with the clarity of the relevant statute and, in any case, believed that Mr. Coscia should have known his specific trading was prohibited. It will likely be up to an appeals court to again consider the constitutional validity of the relevant law.