First Trader Convicted of Spoofing Gets 3-Year Prison Term

  • Panther Energy Trading’s Coscia was charged under Dodd-Frank
  • Greed is only explanation for illegal trades, judge says

Michael Coscia, the first person convicted of spoofing after it was made a crime under the Dodd-Frank Act, was sentenced to less than half the prison time sought by federal prosecutors.

Coscia, 54, who had argued for probation, was sentenced Wednesday to three years in prison by U.S. District Judge Harry Leinenweber in Chicago. The only explanation for Coscia engaging in fraud while he was making $150,000 a month trading futures and had a net worth of $15 million was greed, the judge said.

“This is a serious crime with serious consequences,” Leinenweber said before handing down the sentence. He noted that spoofing has been going on for a long time.

Spoofing, which became illegal under the Dodd-Frank Act, carries a maximum of 10 years in prison. The practice typically consists of systematically placing orders without intending to execute them to trick the market into thinking there’s interest in buying or selling that doesn’t actually exist.

Coscia was convicted by a jury in November of manipulating futures markets by placing unusually large orders he didn’t intend to execute and then filling smaller trades on the opposite side. Prosecutors said it was a bait and switch scheme that yielded Coscia, the head of Panther Energy Trading LLC, more than $1 million over 2 1/2 months in 2011. The scheme resulted in losses to high frequency trading houses that were placing and executing orders at the same time.

For a QuickTake explaining spoofing, click here.

Prosecutors had sought a term as long as seven years and three months. Coscia’s lawyers said sentencing guidelines allowed for a term of only four to 10 months. His three-year prison term is to be followed by two years of supervised release.

Coscia will appeal his conviction and ask to remain free on bond in the meantime, his lawyer said. If that request is denied, Coscia will have to surrender on Sept. 30.

Stephen Senderowitz, Coscia’s lawyer, told the judge his client had paid back $1.4 million gained through the trades at issue and cooperated with a Commodity Futures Trading Commission investigation. He also paid a $3 million fine in connection with the regulatory action against him.

‘Not an Ogre’

Senderowitz described Coscia as a devoted family man who is supporting and caring for his “gravely ill mother.”

“Michael Coscia is not an outlier,” he said. “He is not an ogre.”

Coscia’s sentencing follows a ruling Tuesday in a spoofing lawsuit brought by the Commodity Futures Trading Commission allowing a defendant to continue trading before a trial set for January. Igor Oystacher, of 3Red Trading LLC, was accused by the CFTC of continuing illegal trades even after it sued him.

A jury deliberated for one hour before finding Coscia guilty of six spoofing counts and six fraud counts. He was the first person tried under a provision of the 2010 Dodd-Frank Act that made it illegal to manipulate prices by placing orders without intending to execute them.

Skepticism Gone

Renato Mariotti, who was a prosecutor in the case before leaving for private practice, said after the hearing that there was initially skepticism about whether the government could prove the charges.

“I think that skepticism is gone." Mariotti said. "I think any trader who hears this sentence has to be thinking, ‘I don’t want to go to jail.”’

Testimony during the trial showed that Coscia, like many high-frequency traders, used an algorithm to place, cancel and execute orders. Coscia testified that he intended to execute all his orders at the time he placed them. He said he wasn’t aware of the provision of the Dodd-Frank Act and his lawyers argued in court filings that the law was unconstitutional.

Prosecutors presented trading data from the Chicago Mercantile Exchange and the ICE Futures Europe exchange showing that Coscia placed orders that were much larger than any others trading at the same time and also that he canceled those orders much more frequently.

Gold, Soybeans

During the trial, prosecutors focused on six transactions in the gold, euro, soybean meal, soybean oil, British pound, and copper futures markets. In total, these trades resulted in a profit of $1,070, according to testimony. Coscia conducted thousands of such trades, prosecutors told jurors.

U.S. Attorney Zachary Fardon in Chicago said after the hearing that it’s been suggested that such crimes are “murky” because of technology and the speed at which trading takes place. If there is harm to the market, the office’s Securities and Commodities Fraud Section will bring charges whether the conduct involved algorithmic trading in fractions of a second or manual trading, he said.

“It stands for the principle that if you commit fraud, we will find you and we will investigate you and punish you as appropriate,” Fardon said. “The key take-away is the government is not going to let technology get in the way.”

Three years is a substantial sentence for doing something that isn’t easily distinguished from every day cancellation of orders and will put high-frequency trading firms on alert, said Peter Henning, a law professor at Wayne State University’s Law School in Detroit.

“This should throw a scare into them,” Henning said. “They need to figure out where the line is between permissible trading strategies and spoofing.”

The case is U.S. v. Coscia, 14-cr-00551, U.S. District Court, Northern District of Illinois (Chicago).

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