Calling a Dodd-Frank Act provision prohibiting commodities spoofing "hopelessly vague," the first defendant criminally convicted under the provision has asked the Supreme Court to grant certiorari to determine whether the provision is unconstitutional. If left standing, the Seventh Circuit’s decision affirming the conviction will deepen confusion in the lower courts about what trading activity qualifies as fraud and subject market participants to "crippling uncertainty," the defendant argued in his petition for certiorari (Coscia v. U.S., February 2, 2018).
Coscia spoofing conviction. Michael Coscia, a commodity futures trader and principal at Panther Energy Trading LLC, a proprietary trading firm, was convicted in 2015 of six counts each of spoofing and commodities fraud. As added by the Dodd-Frank Act and defined in Section 4c(a)(5)(C) of the Commodity Exchange Act, spoofing is a disruptive trading practice consisting of bidding or offering with the intent to cancel the bid or offer before execution. Coscia received a three-year sentence.
The Seventh Circuit upheld the conviction in 2017, ruling that the anti-spoofing provision provides clear notice of the prohibited conduct and does not allow for arbitrary enforcement, so is not unconstitutionally vague.
Vagueness. Coscia makes two main points in his petition for certiorari. First, he argues that the statute is impermissibly vague. The provision is not interpreted by CFTC rule, only non-binding guidance issued in 2013. The guidance provides several examples of spoofing activity and states that the Commission intends to distinguish between legitimate trading and spoofing by evaluating the facts and circumstances of each particular case, including a person’s trading practices and patterns. In Coscia’s view, the guidance does not provide the clarity the commodity markets need.
Further, although the provision refers to conduct that "is, is of the character of, or is commonly known to the trade as, ‘spoofing’," Coscia asserts that the term is not at all commonly used in the commodity futures markets and has no accepted industry definition.
Legitimate activity swept up. Coscia’s second argument is that the statute impermissibly subsumes legal activity because even the CFTC agrees there can be perfectly legitimate reasons for placing an order with the intent to cancel it. Defining spoofing to prohibit all "bidding or offering with the intent to cancel the bid or offer before execution" would render large swathes of trading activity heretofore considered lawful and legitimate a federal crime, Coscia contends.
Noting that commodity futures markets are dominated by high frequency trading, Coscia says that many legitimate trading techniques involve placing orders with the expectation and intent they will be cancelled. In the high-frequency trading environment prevailing on the CME, which has no minimum "time in force" requirement, traders put short time limits on their orders to try to minimize the risk they will be filled under unanticipated or adverse market conditions, Coscia says.
As to intent, Coscia characterizes the Seventh Circuit’s ruling as holding that bona fide orders that are subject to genuine risk of being filled can nonetheless be "deceptive" if placed with the intent to impact the market. According to Coscia, this solely intent-based theory of fraud has been rejected by courts in both the commodity fraud and the securities fraud context, as every order inevitably has some impact on the market. Moreover, although most of his orders were cancelled before execution, many did trade in full or in part on the CME exchanges.
Cautioning of overzealousness, Coscia’s counsel asked the high court to grant certiorari, saying:
In the end, then, Coscia has been convicted of a felony based on proof of intentional conduct that is at best a necessary, but not sufficient, condition for "spoofing." And the regulated community is left guessing as to what is sufficient to cross the line. It cannot be that placing an order with intent to cancel will be deemed legitimate trading activity or a federal felony punishable by ten years in prison based on nothing more than the CFTC’s (or a prosecutor’s) post hoc "evaluati[on of] all of the facts and circumstances."
The case is No. 17-1099.
Attorneys: Michael S. Kim (Kobre & Kim LLP) and Paul D. Clement (Kirkland & Ellis LLP) for Michael Coscia.
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