Spoofing Law Gets Biggest Test Yet Before a Chicago Juryby , , and
Michael Coscia faces first criminal trial related to 2010 law
Case may hinge on how much judge allows Coscia to cite rules
A Chicago jury began hearing arguments that a commodities trader built and employed software to manipulate prices, in the biggest test yet of U.S. efforts to police financial markets against spoofing.
Prosecutors contend Michael Coscia, the principal of Panther Energy Trading LLC, placed orders he didn’t intend to fill to manipulate prices in a scheme that raked in illegal profits of about $1.4 million over three months. Coscia, indicted last year and charged with six counts of commodities fraud and six of spoofing, claims he had no intent to defraud anyone and didn’t violate the law.
The trial comes after a year of U.S. law enforcement and regulatory actions against traders who authorities allege systematically place orders they don’t intend to execute to trick the market into thinking there’s demand that doesn’t actually exist. It’s the first time jurors are being asked to apply a provision in 2010’s Dodd-Frank Act that singles out spoofing as a form of illegal market manipulation.
Coscia disrupted financial markets and tricked other traders, using two programs to place and then cancel orders in “a blink of the eye,” Assistant U.S. Attorney Renato Mariotti told jurors Monday. “He made a little money each time. He did it hundreds of thousands of times,” Mariotti said.
The trial’s outcome will potentially shape government cases against other accused spoofers, including Navinder Singh Sarao. He is fighting extradition from the U.K. to face charges in Chicago related to the May 2010 flash crash that temporarily wiped out almost $1 trillion from the value of U.S. equities.
“It is a groundbreaking case,” said Trace Schmeltz, a partner at law firm Barnes & Thornburg LLP and co-chair of the its financial and regulatory litigation group.
Coscia’s lawyers intend to put the government’s anti-spoofing efforts themselves on trial. The new law is too vague and Coscia’s actions in 2011 didn’t match the limited examples of spoofing put out by regulators guiding market users on how they intended to enforce the statute, his lawyers said in court filings.
There are no rules on the exchanges prohibiting the placement of orders for different quantities of futures contracts on both sides of the market, Coscia contends. He also plans to show he canceled orders at a rate well under the allowed limit, according to the filing.
Coscia is wrongly accused and prosecutors have the case “all wrong,” his lawyer, Steven Peikin, told jurors in his opening statement Monday.
“Michael Coscia is no fraudster,” Peikin said. “He entered every order with the intent to trade the order.”
The government, for its part, wants to bar Coscia from introducing any evidence that shows ambiguity in the law or trading regulations. U.S. District Judge Harry Leinenweber issued a mixed decision on that point, giving the defense some latitude to show Coscia may have been led astray by conflicting rules.
The rules may be relevant for Coscia to show that he acted consistently with permitted market behavior and “thus did not reflect intent to defraud or cancel orders prior to execution,” the judge said.
Jurors will have to decide whether Coscia placed orders with the intent to cancel them, which will require digging into how he set up trading software. Most of the nine men and three women selected Monday as jurors told the judge they didn’t have an opinion on high-frequency trading and hadn’t previously heard of spoofing.
“We’re going to find out whether you can determine a person’s state of mind by how they programmed an algorithm,” said Schmeltz of Barnes & Thornburg.
Cosica persuaded the judge that the government should be barred from introducing any evidence of earlier investigations and settlements connected to his trading activity, or the fact that other traders had complained about his behavior.
In 2013, Coscia settled civil claims by the U.S Commodity Futures Trading Commission by paying a $2.8 million fine and consenting to a one-year trading ban.
This month, the CFTC accused Chicago-based trader Igor Oystacher and his firm 3Red Trading LLC in a lawsuit of spoofing over 51 trading days. Oystacher previously racked up $660,000 in fines from three of the world’s largest futures exchanges.
If convicted of spoofing, Coscia could face as long as 10 years in prison, plus a fine of as much as $1 million for each count. Each commodities-fraud charge carries a maximum sentence of 25 years in prison and a fine of as much $250,000.
This type of case is going to present of challenges for the U.S. Attorney’s Office because it’s a complicated market and the conduct doesn’t necessarily appear to be wrongful because traders put in orders and cancel them all the time, said Peter Henning, a law professor at Wayne State University’s Law School in Detroit.
The prosecutors have to show intent and “that’s never easy,” Henning said. “If the government loses a couple of these cases it may be that you can’t prove spoofing is a crime,” Henning said. “Even though it’s outlawed you may not be able to prove that spoofing is illegal.”
The case is U.S. v. Coscia, 14-cr-00551, U.S. District Court, Northern District of Illinois (Chicago).