The first conviction under the new anti-spoofing provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank”) was rendered on November 3, 2015. Dodd Frank bans “bidding or offering with the intent to cancel the bid or offer before execution.” According to the prosecution, defendant Michael Coscia used two algorithmic programs to place small buy or sell orders, which were subsequently followed by rapidly retracted large orders on the opposite side of the original trades, resulting in fills of his original orders at favorable prices and resulting market deception. The prosecution presented evidence that the high volume of orders placed by the defendant were canceled within 400 milliseconds and argued that Coscia wanted to spoof the market into believing there was legitimate interest in trading, while there was virtually no possibility that the orders would be completed. Coscia’s defense was that the federal spoofing law was vague because it did not distinguish between lawful cancellations of orders and those that constitute violations. The jury found Coscia guilty of six spoofing charges and six counts of commodities fraud. Coscia will be sentenced in March 2016 and faces substantial fines and imprisonment on each count of conviction.
This decision is notable because the defendant had already paid substantial penalties to various regulators for this conduct. Coscia had entered into settlements with the Commodity Futures Trading Commission, the UK Financial Conduct Authority and the Chicago Mercantile Exchange concerning the same conduct, resulting in monetary sanctions, trading prohibitions and disgorgement of trading profits. The full extent of what conduct rises to the level of unlawful spoofing remains unclear. From this jury’s perspective, the volume and size of the cancelled trades combined with their links to profitable fills were dispositive.
Federal prosecutors have filed similar charges in one other pending case and are seeking extradition of a UK trader in connection with the May 2010 flash crash in what some suggest will be the next chapter in spoofing enforcement activity.
If you have any questions concerning this bulletin, please contact Rita Glavin or Michael Considine, the co-heads of Seward & Kissel’s Government Enforcement and Internal Investigations Practice Group or Lauri Goodwyn in the Corporate Finance Department.
