Federal Prosecutors Plan To Put Spoofers In Their Place With First Ever Criminal Conviction

Federal Prosecutors Plan To Put Spoofers In Their Place With First Ever Criminal Conviction

United States federal prosecutors have secured a victory in the courtroom as jurors took only one hour to reach a guilty verdict in the case against commodities trader, Michael Coscia. It is likely that the win will encourage prosecutors to continue to aggressively go after traders who conduct the practice of spoofing.

Spoofing takes place when investment traders purchase a number of stocks – thereby generating market interest in the stock- and then cancelling the purchase before the transaction is completed. During that lapse of time between purchasing the stock and closing the deal, the market is essentially manipulated. Federal prosecutors argue that this market manipulation is illegal under the 2010-enacted Dodd-Frank Act – by basically saying that you cannot place orders for stocks if you do not intend to trade on them.

It is pursuant to this act that Michael Coscia, head of Panther Energy Trading LLC, was charged and tried. He was also charged with fraud.

The jury consisted of eight men and four women, and they deliberated for about one hour before finding the 53 year-old Coscia guilty of the charges.

Coscia’s trial was closely watched by trading firms and lawyers everywhere as the holding will have a major impact on future cases.

Michael Friedman, general counsel at Trillium Trading, observed that with the government’s victory, more spoofing cases will be brought in the (near) future. “There’s going to be more of them. The [Commodity Futures Trading Commission (CFTC)] has a new tool in its toolbox that it wasn’t sure worked. Now they know it works.”

Friedman also added that the guilty verdict demonstrates that jurors can tell the difference between regular market-making activity and spoofing schemes.

Prosecutors proved their case by showing that large orders placed by Coscia were frequently and regularly canceled, while the smaller orders he placed were hardly ever canceled. His trading activity showed that he would first place a small order one side of the market and then big orders on the other side. The big orders were thereafter canceled after he executed the smaller trades.

Prosecutors demonstrated that Coscia’s large orders were placed for the sole purpose of manipulating the market and to change prices so Coscia could make profits on the other side of the trade. Prosecutors called the practice a “bait-and-switch scheme” that allowed Coscia to make over $1.4 million over a three month period.

Coscia is scheduled to be sentenced in the United District Court on March 17th. The fraud counts each carry a maximum sentence of 25 years in federal prison and a $250,000 fine. The spoofing charges carry a maximum sentence of 10 years and a $1 million fine.

Cliff Histed, a Chicago federal prosecutor when Coscia was indicted, observed that, “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. 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.”

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