A Seventh Circuit panel upheld the conviction of New Jersey trader Michael Coscia for violating the anti-spoofing provisions of the Dodd-Frank Act and commodity fraud. The appellate court also affirmed that the district court did not err in applying a 14-point loss enhancement. Coscia is currently serving a three-year prison sentence which was imposed in July 2016 (U.S. v. Coscia, December 28, 2016, Ripp, K.). The decision was long awaited by industry observers as Coscia was the first defendant to be indicted, to stand trial, and to be convicted and sentenced under Dodd-Frank’s anti-spoofing provision. Likewise, this was the first time the anti-spoofing provision was considered by an appellate court. In reaching its decision, the court soundly rejected defendant Coscia’s claims that the anti-spoofing provision was unconstitutionally vague or that it allowed for arbitrary enforcement, the cornerstone of the defense position.
The anti-spoofing provision is not unconstitutionally vague. The decision is a "complete and total victory for the government which won on every single point," remarked Renato Mariotti, the lead prosecutor at trial and now a partner at the Chicago office of Thompson Coburn LLP. According to Mariotti, the significance of the decision is that it lays to rest the notion that Dodd-Frank’s anti-spoofing provision is unconstitutionally void for vagueness. In its decision, the court cited the language of the provision which defines "spoofing" as "bidding or offering with the intent to cancel the bid or offer before execution," and, in final analysis, found that Coscia had adequate notice of the prohibited conduct. The court unambiguously made this point, stating: "The anti-spoofing provision provides clear notice and does not allow for arbitrary enforcement. Consequently, it is not unconstitutionally vague." Another significant aspect of the decision, according to Mariotti, is that the court found the anti-spoofing provision was not void for vagueness as applied to any trader, not just to the defendant. "In this respect, the court went beyond what the government was seeking," Mariotti observed, and noted this will give the government an "upper hand" in future spoofing prosecutions.
The anti-spoofing provision does not allow for arbitrary enforcement. The court also rejected Coscia’s contention that the anti-spoofing provision would give rise to arbitrary enforcement where law enforcement could arrest and prosecute on an ad hoc and subjective basis. The court rejected this assertion, noting that the provision requires "the intent to cancel the bid or offer before execution." This, the court observed, imposed clear restrictions on whom a prosecutor could charge with spoofing—"prosecutors can charge only a person whom they believe a jury will find possessed the requisite specific intent to cancel orders at the time they were placed."
The anti-spoofing provision does not subsume certain legal orders. Some industry proponents have expressed concerns during the course of this litigation that "stop-loss orders" (an order to sell a security once it reaches a certain price) or "fill-or-kill orders" (an order that must be executed in full immediately, or the entire order is cancelled) might be deemed to be impermissible under the anti-spoofing provision. The court put these concerns to rest, noting that these legal trades differ from spoofing orders, as they are cancelled only following a condition subsequent to placing the order. In stark contrast, orders placed in a spoofing scheme are never intended to be filled.
Underlying wrongful conduct. The spoofing and commodities fraud charges brought in this case were based on Michael Coscia having commissioned and utilized high frequency trading methodologies and computer algorithms which were designed to place small and large orders simultaneously on opposite sides of the commodities market in order to create illusory supply and demand, and consequently, induce artificial market movement. Orders were typically placed and cancelled within fractions of a second. During the trial, prosecutors said that Coscia made $1.4 million in about two months. They also asserted that when he manipulated futures contracts prices on the Chicago Mercantile Exchange, he caused economic loss to other traders and market participants.
In the aftermath of the government’s resounding victory in this matter, industry participants (and their lawyers) will be keeping a close eye on the government regarding their next moves in this area. Former prosecutor Mariotti observes, "for now the Seventh Circuit decision in Coscia is the law of the land, and the government will have free reign to investigate and prosecute spoofing violations."
The case is No. 16-3017.
Attorneys: Andrianna D. Kastanek, Office of the U. S. Attorney, for the United States. Michael S. Kim (Kobre & Kim LLP) for Michael Coscia.
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