7th Circuit Affirms Spoofing Conviction

August 16, 2017

In 2014, Michael Coscia, the manager and sole owner of Panther Energy Trading LLC, was indicted by a federal Grand Jury for his alleged $1.4 million spoofing and commodities fraud scheme, which occurred in 2011 and  involved gold, soybean meal, soybean oil, high-grade copper, Euro FX and Pounds FX currency futures. The Indictment alleged six counts each of commodities fraud and "spoofing." If convicted, Coscia faced up to 25 years in prison and a $250,000 fine on each of the six commodities counts and up to 10 years in prison and $1 million fine on each of the spoofing counts.

SIDE BAR: The Spoofing Counts: Title 7, United States Code:

Section 6c(a)(5)(C):

(5) Disruptive practices. It shall be unlawful for any person to engage in any trading, practice, or conduct on or subject to the rules of a registered entity that --
(A) violates bids or offers;
(B) demonstrates intentional or reckless disregard for the orderly execution of transactions during the closing period; or
(C) is, is of the character of, or is commonly known to the trade as, "spoofing" (bidding or offering with the intent to cancel the bid or offer before execution).

Section 13(a)(2):

(a) Felonies generally. It shall be a felony punishable by a fine of not more than $1,000,000 or imprisonment for not more than 10 years, or both, together with the costs of prosecution, for:
. . .

(2) Any person to manipulate or attempt to manipulate the price of any commodity in interstate commerce, or for future delivery on or subject to the rules of any registered entity, or of any swap, or to corner or attempt to corner any such commodity or knowingly to deliver or cause to be delivered for transmission through the mails or interstate commerce by telegraph, telephone, wireless, or other means of communication false or misleading or knowingly inaccurate reports concerning crop or market information or conditions that affect or tend to affect the price of any commodity in interstate commerce, or knowingly to violate the provisions of section 6, section 6b, subsections (a) through (e) of subsection [1] 6c, section 6h, section 6o(1), or section 23 of this title.

First Federal Spoofing Prosecution

Coscia's prosecution was trumpeted by the United States Department of Justice ("DOJ") as "the first federal prosecution nationwide under the anti-spoofing provision that was added to the Commodity Exchange Act by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act." "High-Frequency Trader Indicted For Manipulating Commodities Futures Markets In First Federal Prosecution For "Spoofing"" (DOJ Press Release, October 2, 2014).


After a seven-day trial in the United States District Court for the Northern District of Illinois ("NDIll"), Coscia was convicted on all counts and, thereafter, sentenced to 36 months in prison followed by two years of supervised release.

7Cir Appeal

Coscia appealed the NDIll findings and sentence to the United States Court of Appeals for the Seventh Circuit ("7Cir"). United States of America, Plaintiff/Appellee, vs. Michael Coscia, Defendant/Appellant (Opinion, United States Court of Appeals for the Seventh Circuit, No. 16-3017, August 7, 2017) begins with this summary [Ed: footnotes omitted]:

RIPPLE, Circuit Judge. Today most commodities trading takes place on digital markets where the participants utilize computers to execute hyper‐fast trading strategies at speeds, and in volumes, that far surpass those common in the past.

This case involves allegations of spoofing and commodities fraud in this new trading environment. The Government alleged that Michael Coscia commissioned and utilized a computer program 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, to induce artificial market movement.   Mr. Coscia was charged with violating the anti‐spoofing provision of the Commodity Exchange Act, 7 U.S.C. §§ 6c(a)(5)(C) and 13(a)(2), and with commodities fraud, 18 U.S.C. § 1348(1). He was convicted by a jury and later sentenced to thirty‐six months' imprisonment.

Mr. Coscia now appeals. He submits that the anti‐spoofing statute is void for vagueness and, in any event, that the evidence on that count did not support conviction. With respect to the commodities fraud violations, he submits that the Government produced insufficient evidence and that the trial court applied an incorrect materiality standard. Finally, he contends that the district court erred in adjudicating his sentence by adding a fourteen‐point loss enhancement.

We cannot accept these submissions. The anti‐spoofing provision provides clear notice and does not allow for arbitrary enforcement. Consequently, it is not unconstitutionally vague. Moreover, Mr. Coscia's spoofing conviction is supported by sufficient evidence. With respect to the commodities fraud violation, there was more than sufficient evidence to support the jury's verdict, and the district court was on solid ground with respect to its instruction to the jury on materiality. Finally, the district court did not err in applying the fourteen‐point loss enhancement.

Pages 1 - 3 of the 7Cir Opinion

Judge Ripple provides us with an impressive and comprehensive explanation of spoofing and avoids conflating that illegal strategy with others such as high frequency trading ("HFT"), which is perfectly legal when compliant with existing rules and regulations. Instead of taking the attractive route of vilifying unpopular market practices such as HFT, Judge Ripple goes about his job with intelligence and persuasion and, in the end, we are presented with a dispassionate autopsy. Consider this preliminary commentary [Ed: footnotes omitted]:

Although high‐frequency trading has legal applications, it also has increased market susceptibility to certain forms of criminal conduct. Most notably, it has opened the door to spoofing, which Congress criminalized in 2010 as part of the Dodd‐Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111‐203, 124 Stat. 1376 (2010). The relevant provision proscribes "any trading, practice, or conduct that . . . is, is of the character of, or is commonly known to the trade as, ‘spoofing' (bidding or offering with the intent to cancel the bid or offer before execution)." 7 U.S.C. § 6c(a)(5). For present purposes, a bid is an order to buy and an offer is an order to sell.

In practice, spoofing, like legitimate high‐frequency trading, utilizes extremely fast trading strategies. It differs from legitimate trading, however, in that it can be employed to artificially move the market price of a stock or commodity up and down, instead of taking advantage of natural market events (as in the price arbitrage strategy discussed above). This artificial movement is accomplished in a number of ways, although it is most simply realized by placing large and small orders on opposite sides of the market. The small order is placed at a desired price, which is either above or below the current market price, depending on whether the trader wants to buy or sell. If the trader wants to buy, the price on the small batch will be lower than the market price; if the trader wants to sell, the price on the small batch will be higher. Large orders are then placed on the opposite side of the market at prices designed to shift the market toward the price at which the small order was listed.

For example, consider an unscrupulous trader who wants to buy corn futures at $3.00 per bushel in a market where the current price is $3.05 per bushel. Under the basic laws of sup‐ ply and demand, this trader can drive the price downward by placing sell orders for large numbers of corn futures on the market at incrementally decreasing prices (e.g., $3.04, then $3.03, etc.), until the market appears to be saturated with individuals wishing to sell, the price decreases, and, ultimately, the desired purchase price is reached. In short, the trader shifts the market downward through the illusion of down‐ ward market movement resulting from a surplus of supply. Importantly, the large, market‐shifting orders that he places to create this illusion are ones that he never intends to execute; if they were executed, our unscrupulous trader would risk extremely large amounts of money by selling at suboptimal prices. Instead, within milliseconds of achieving the desired downward market effect, he cancels the large orders.

Once our unscrupulous trader has acquired the commodity or stock at the desired price, he can then sell it at a higher price than that at which he purchased it by operating the same scheme in reverse. Specifically, he will place a small sell order at the desired price and then place large buy orders at increasingly high prices until the market appears flooded with demand, the price rises, and the desired value is hit. Returning to the previous example, if our unscrupulous trader wants to sell his corn futures (recently purchased at $3.00 per bushel) for $3.10 per bushel, he will place large buy orders beginning at the market rate ($3.00), quickly increasing that dollar value (e.g., $3.01, then $3.02, then $3.03, etc.), creating an appearance of exceedingly high demand for corn futures, which raises the price, until the desired price is hit. Again, the large orders will be on the market for incredibly short periods of time (fractions of a second), although they will often occupy a large portion of the market in order to efficiently shift the price.

 7Cir Opinion Pages 5 - 7

Bill Singer's Comment

Among my most common complaints when it comes to regulatory and judicial decisions and opinions is that they lack "content and context." We struggle to understand what happened. We fail to comprehend why a given act was viewed as misconduct or illegal. We are unable to grasp the rationale underpinning a fine, suspension, bar, or incarceration.  In sharp contrast to much of what I read from regulatory organizations and courts, Judge Ripple's Opinion is flawless.  Truly, no point is served by my taking up space in the BrokeAndBroker.com Blog via such trite commentary as "in other words," or "as the Court stated," or "as the Court explained." Consequently, do yourself a favor and just read this Opinion.