New Jersey resident Michael Coscia, the prior manager and sole owner of Panther Energy Trading LLC, was indicted in Chicago last week for alleged spoofing activities involving futures traded on CME Group and ICE Futures Europe from August through October 2011.

The Commodity Futures Trading Commission, the UK Financial Conduct Authority and the Chicago Mercantile Exchange previously brought enforcement proceedings in July 2013 and entered into simultaneous settlements with Mr. Coscia and Panther related to this same conduct, assessing aggregate sanctions in excess of approximately US $3 million and various trading prohibitions. The CME also required disgorgement of US $1.3 million of trading profits. (Click here to access more information on these civil enforcement actions 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 what is now known as Between Bridges.)

According to the indictment, during the relevant time, Mr. Coscia utilized two computer-driven algorithmic trading programs that repeatedly placed small buy or sell orders in a market, followed by the rapid placement and retraction of large orders—so called “quote orders”—on the opposite side of his small orders. He supposedly did this in order to deceive the market and help ensure the execution of his small orders at favorable prices.

After the initial small orders were executed, Mr. Coscia would reverse the process—placing new small orders on the opposite side of the market as his initial filled orders and large quote orders on the opposite side of the new small orders. He allegedly traded this way in order to ensure the fills of the new small orders and profits on the overall transaction.

The indictment claimed that, as part of his “scheme,” Mr. Coscia,

[d]esigned his programs to cancel the quote orders within a fraction of a second automatically, without regard to market conditions, even if the market moved in a direction favorable to the quote orders. Coscia programmed the quote orders to cancel quickly and automatically because he did not intend for the quote orders to be filled when he entered them, but instead intended to trick other traders into reacting to the false price and volume information he created with his fraudulent and misleading quote orders.

The indictment alleges that, in connection with his unlawful activity, Mr. Coscia traded overall 17 different CME markets and three different ICE Futures Europe markets, including gold, foreign exchange and soybean oil futures contracts. Mr. Coscia made over US $1.5 million as a result of his trading activity, claims the indictment.

Mr. Coscia’s indictment alleges six counts of commodities fraud and six counts of spoofing that relate solely, however, to six discrete trading episodes which, in total, allegedly netted Mr. Coscia US $1,070 in profits.

Spoofing was expressly prohibited in 2010 by amendments to relevant law enacted as part of the Dodd-Frank reforms. This is the first case brought by the US Attorney’s Office in Chicago under this new law.

The CME Group also recently enacted a new rule expressly prohibiting certain disruptive trading practices. (Click here to see an overview of these new rules in “CME Group Issues New Rule Regarding Disruptive Trading Practices” in the September 4, 2014 edition of Between Bridges.)

Mr. Coscia faces substantial prison time and fines if convicted—25 years for each count of commodities fraud and 10 years for each count of spoofing.

The US Attorney’s Office in Chicago established a Securities and Commodities Fraud Section earlier this year “dedicated to protecting markets and preserving investors’ confidence.”

My View: Whatever 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) related to just a very small portion of Mr. Coscia’s alleged overall wrongful conduct (US $1,070 of US $1.5 million of total profits) 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?