Friday, April 08, 2016

Spoofing Verdict Against High-Speed Trader Stands

By Matthew Garza, J.D.

The federal district court in Chicago rejected an attempt by a futures trader to overturn his conviction for commodities fraud and spoofing in an opinion that elucidated the criminal standard for a conviction under the Dodd-Frank-prohibited activity (U.S. v. Coscia, April 6, 2016, Leinenweber, H.).

Banned activity. The court said Michael Coscia, of Panther Energy Trading LLC, implemented a high-frequency trading program in August 2011 that placed large orders intended to move the market in a particular direction, and cancelled them before execution, allowing him to profit from small orders placed on the other side. The U.S. Attorney for the Northern District of Illinois charged Coscia with six counts of “spoofing” and six counts of commodities fraud in October 2014 and obtained a guilty verdict after one hour of jury deliberations in November 2015. The CFTC previously ordered Coscia to pay $2.8 million for his activity.

Spoofing was banned by the Dodd-Frank Act, which added Section 4c(a)(5)(C) of the Commodity Exchange Act to proscribe conduct 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).” Futures traders are closely watching developments in this area to determine precisely what conduct will be considered spoofing, and how successful the government is in bringing these cases.

Review standard. Coscia faced a daunting hurdle to overturn the verdict. The court explained that in order to grant his motion for judgment of acquittal, it must find that the trial record contained “no evidence, regardless of how it is weighed, from which the jury could have concluded beyond a reasonable doubt that [the defendant] is guilty.” Coscia challenged the jury’s verdict on commodities fraud and spoofing, while also challenging the jury instructions as well as testimony given by government witnesses. He failed on each count.

Sarbanes-Oxley Act. Coscia asserted that the government needed to show that the actual orders he placed were fraudulent, but instead it relied on a “pure inducement” theory, which pinned the fraud on his actions to induce market participants to trade with him. The court said that the charges, brought under Sarbanes-Oxley Act Sec. 807 (18 USC §1348), required that the activity involved a scheme to defraud by intentionally misleading market participants about price and volume information through sham quote orders. The government’s allegations fit these requirements, said the court.

Coscia challenged the sufficiency of the evidence by asserting that the record did not show that his orders, which stayed on the market for 100 to 450 milliseconds, were deceptive. Some of his large orders traded, he pointed out. The court said this argument ignored substantial evidence showing that he never intended to fill large orders. Coscia’s programmer in fact testified that his program was designed to reduce the risk that orders could be filled. The deception was also material, said the court.

Vagueness. Coscia next attacked the spoofing statute as unconstitutionally vague, arguing that it encompasses much routine, innocuous conduct by commodities traders. The court said that his conduct could be differentiated from legitimate practices such as “fill-or-kill” or “partial-fill” orders because he intended to cancel the orders. The statute also provided sufficient notice to him that his activity was prohibited, said the court, noting that it was not reasonable to conclude that Congress intended to criminalize all orders that are eventually cancelled at any point, for any reason. The statute has a clear purpose—“to prevent abusive trading practices that artificially distort that market,” the court said, and that occurs when there is intent to defraud through the placement of illusory orders.

The court went on to reject Coscia’s argument that the jury instructions were insufficient. The Sarbanes-Oxley instructions properly required the jury to find separately that there was a scheme to defraud, that Coscia acted with an intent to defraud, and that the scheme was material. The spoofing instructions, which ignored his request that the jury be instructed that he not be found guilty if he intended to cancel orders only under certain conditions, were also sufficient. He was free to argue, said the court, that his program only cancelled orders under certain conditions. The court also rejected Coscia’s challenges to testimony given by a number of government witnesses.

The case is No. 14 CR 551.