Swift Guilty Verdict in Spoofing Trial May Fuel New Prosecutions in U.S.

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  • Commodities trader is first convicted under spoofing law
  • Prosecutors already seek extradition in Flash Crash case

How 'Spoofing' Might Have Crashed the Market

The lightning fast guilty verdict against a high-speed commodities trader may embolden prosecutors who have gone on the offensive in a year of heightened regulatory scrutiny of spoofing.

Michael Coscia’s trial was the first use of an anti-spoofing law after the 2010 Dodd-Frank Act made it illegal to manipulate prices by placing orders without intending to trade on them. That law, which also provided an easier standard of proof to try cases, was put to the test in Chicago federal court amid stepped-up civil enforcement by the Commodity Futures Trading Commission.

The jury of eight men and four women deliberated for about an hour before finding the 53-year-old head of Panther Energy Trading LLC guilty on the spoofing charges. The trial was widely watched by lawyers and trading firms as a bellwether for future cases.

The verdict may prove influential as U.S. authorities pursue extradition of a U.K. trader accused of helping cause the 2010 flash crash, and a lawsuit against a Chicago trader who was fined $660,000 for spoofing by three of the world’s largest futures markets. They too are accused of systematically placing orders they didn’t intend to execute to trick the market into thinking there was demand or supply that didn’t actually exist.

New Tool

With Tuesday’s decisive government victory, more spoofing cases can be expected, said Michael Friedman, general counsel at Trillium Trading.

“There’s going to be more of them,” said Friedman, who contends the verdict shows jurors can distinguish spoofing schemes from regular market-making activity. “The CFTC has a new tool in its toolbox that it wasn’t sure worked. Now they know it works.”

Prosecution witnesses from two exchanges showed data on how large orders placed by Coscia were frequently canceled, while smaller orders he placed were canceled at a far lower rate. Those large orders were placed only to manipulate the market and move prices so Coscia could make money on the other side of the trade, prosecutors said. They said he made an illegal profit of about $1.4 million over three months in what they called a “bait-and-switch scheme.”

Jurors left the federal courthouse without commenting after finding Coscia guilty of six counts of commodities fraud and six counts of spoofing.

Possible Sentence

Coscia is scheduled to be sentenced by U.S. District Judge Harry Leinenweber on March 17, prosecutors said. The fraud counts each carry a maximum sentence of 25 years in prison and a $250,000 fine, while the spoofing charges have 10-year maximum and a $1 million fine, they said.

U.S. Attorney Zachary T. Fardon in Chicago said in a statement that the office’s Securities and Commodities Fraud Section will continue to prosecute such violations.

“The speed with which the jury returned a verdict is very surprising, given the complexity of the case, and the efforts of a very strong defense team,” said Cliff Histed, who was a Chicago federal prosecutor when Coscia was indicted and is now in private practice. “Trading firms and their executives, attorneys, risk managers, and compliance personnel will need a deeper understanding of how prosecutors conduct criminal investigations and make charging decisions, and will need to develop strategies to influence those decisions if possible.”

Gold, Soy Beans

Prosecutors focused on six transactions, all from 2011, 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 the testimony. Prosecutors said Coscia conducted thousands of such trades. 

His trading showed that he would first place a small order and then large orders on the other side of the market that were subsequently canceled after he executed smaller trades, Federal Bureau of Investigation Special Agent Brent Potter testified.

Jeremiah Park, a computer programmer who worked for Panther Energy, created trading algorithms under Coscia’s direction that included “quote” orders designed to “pump market,” according to Park’s notes and testimony. The quote orders were to stimulate the market to get a reaction, Park said.

Steven Peikin, one of Coscia’s lawyers, argued that high-frequency traders routinely canceled orders. He told the jury that Coscia’s trading strategy was unique, but not illegal.

Novel, Complex

“We’re disappointed by the verdict,” Peikin said in an e-mailed statement. “We believe this case presents many novel and complex issues, and Mr. Coscia intends to pursue all of his legal options.”‎

Coscia, who took the stand in his own defense, testified he didn’t do anything wrong and repeatedly said he intended to trade on every order he placed. He was asked whether he fraudulently induced other market participants to react to the deceptive market information he created.

“I didn’t induce anyone,” Coscia said. “There’s no deceptive market information either.”

In 2013, Coscia settled civil claims by the CFTC by paying a $2.8 million fine and consenting to a one-year trading ban. The judge didn’t allow prosecutors to tell jurors about the settlement.

In what may be the next spoofing trial, Chicago federal prosecutors are seeking extradition of a U.K. trader on charges tied to the May 2010 flash crash, which temporarily wiped out almost $1 trillion in value of U.S. equities. The defendant, Navinder Singh Sarao, is fighting the extradition bid.

Another pending case involves Chicago-based trader Igor Oystacher and his firm 3Red Trading LLC, which were sued by the CFTC for allegedly spoofing over 51 trading days.


Coscia grew up in Brooklyn, New York, the son of a subway token clerk and the first in his family to go to college. During the day, he worked as a mail carrier. At night, he went to Brooklyn College, graduating in 1986 with a degree in business management.

At trial, he testified he first became interested in the markets after his father put money on a horse race, turning a $2 bet into a $55,000 winner. His father put the winnings in the market, and Coscia tracked the investments, sparking his interest in finance.

Coscia had a cousin who worked at the New York Mercantile Exchange, which led him to the trading floor, starting as a clerk. Married for 25 years, and now with a son attending the University of Michigan, Coscia has spent almost three decades as a trader.

The First

Patrick Cotter, a former Chicago federal prosecutor who primarily represents defendants in financial-fraud cases, said the first guilty verdict under a new law is always important.

“Where the prosecutors say, ‘This is a fraud’ and the defense says, ‘No, we’re just playing the angles,’ it’s a huge thing when the jury hears the case and says, ‘No, we think this falls into the traditional four corners of what we call fraud,’” Cotter said.

“Whatever attitudes that might be out there in the industry that ‘no, no we’re sharper than others,’ that will end now,” he said.

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