7th Circuit upholds anti-spoofing conviction

A commodities trader who was the first person to be convicted of a kind of illegal trading dubbed spoofing failed to convince the 7th Circuit Court of Appeals that the anti-spoofing statute in the Dodd-Frank Act is unconstitutionally vague.   

Michael Coscia had a computer program designed that would allow him to artificially manipulate the price of a stock so he would buy low and sell high. For a 10-week period, he used the algorithm-based program to place large orders which he used to inflate and deflate the value. Then he would make a small order to either buy or sell and subsequently cancel the large order.

The act of placing a bid on the stock market with the intent of canceling the offer before the sale is known as spoofing.

Referring to Coscia as “our unscrupulous trader,” the 7th Circuit used his trading of copper futures as an example. He first placed a small order for the future contracts then used a large order to incrementally drive the price up. Once at the top, he sold the few futures then cancelled the large order. Immediately, he placed a buy order for the same number of future contracts and, again, made a large order which he used to decrease the price.

Coscia was indicted by a grand jury in October 2014 for spoofing and commodities fraud. He went to trial a year later and the jury convicted him on all counts. The U.S. District Court for the Northern District of Illinois, Eastern Division, sentenced him to three years in prison and two years of supervised release.

On appeal, Coscia argued the anti-spoofing provision gives inadequate notice of the proscribed conduct. In the statute, the word “spoofing” is placed in quotation marks and the parenthetical phrase that follows is a definition that Congress believed had been established in the industry.

In addition, he contended the lack of a Commodity Futures Trading Commission regulations defining spoofing bolsters to his inadequate notice argument.  

Coscia also extended his reasoning that even if the statute gives adequate notice, the parenthetical definition, he said, encourages arbitrary enforcement.

The 7th Circuit disagreed, upholding his conviction in United States of America v. Michael Coscia, 16-3017, in a 42-page unanimous opinion written by Senior Judge Kenneth Ripple.
  
“At bottom, Mr. Coscia’s vagueness challenge fails. The statute clearly defines the term spoofing, providing sufficient notice,” Ripple wrote. “Moreover, Mr. Coscia’s actions fall well within the core of the anti?spoofing provision’s prohibited conduct, precluding any claim that he was subject to arbitrary enforcement. Furthermore, even if his behavior were not well within the core of the anti?spoofing provision’s prohibited conduct, the statute’s intent requirement clearly suggests that the statute does not allow for ad hoc or subjective prosecution.”