THE NEW FEDERAL FINANCIAL CRIME OF “SPOOFING”: EVEN ON THE SCORECARDS APPROACHING ROUND THREE; LESSONS FOR THE FUTURE?
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By Roger C. Wilson*
© 2018 The Roger C. Wilson Law Firm, PC, Atlanta Georgia
After the first jury trials in prosecutions for a new federal financial crime - “spoofing” - the score is even as between the Government and defendants. The litigation experience to date provides possible instruction and strategy roadmaps for lawyers handling future spoofing cases and other cases involving similar alleged financial crimes.
The crime of “spoofing”, applicable to commodities trading, was created by the Dodd-Frank Act in 2010 (new section 4c(a)(5)(C) of the Commodity Exchange Act -- (7 U.S.C. § 6c(a)(5)(C)). (Termed “spoofing” in the new statute, it is also referred to as “layering”.) Basically, it is the placing of buy or sell orders for commodities with the intention that the orders will not be completed. The new law targets situations in which such orders are placed solely to affect market price and in the commodity, so that the person placing the orders then can benefit from the resulting price moves by conducting actual trades at the new prices.
The spoofing prohibition is one part of the larger targeting of “market manipulation”, also applicable (by other statutes) to the trading of stocks as well as to commodities.
In late 2016 the first spoofing case went to trial in Chicago against New Jersey resident, Michael Coscia, on twelve charges of spoofing and commodities fraud. (For each of six transactions targeted in the indictment, Coscia was charged with both spoofing, under 7 U.S.C. §§ 6c(a)(5)(C) and 13(a)(2), and criminal commodities fraud under 18 U.S.C. § 1348.) 1:14-CR-00551 (N.D. Ill). In a dramatic opening success for the Government, the jury took barely an hour to find Coscia guilty on all counts.
New indictments and cases followed the initial success. A few weeks ago the second case went to trial, this one against a UBS trader, Andre Flotron. 3:17-CR-00220 (D. Conn.). Equally dramatically, in that second trial the jury took not much longer than an hour to find Flotron not guilty. To complete the drama, just after the Flotron acquittal, the U.S. Supreme Court declined to consider Coscia’s appeal of his conviction.
Thus, the score is now 1 to 1 for the Government and defense, and the Supremes are not getting involved. Defense lawyers in future trials will be anxious to identify and utilize any lessons or strategies that may be available from these two opening trials.
© 2018 The Roger C. Wilson Law Firm, PC, Atlanta Georgia
After the first jury trials in prosecutions for a new federal financial crime - “spoofing” - the score is even as between the Government and defendants. The litigation experience to date provides possible instruction and strategy roadmaps for lawyers handling future spoofing cases and other cases involving similar alleged financial crimes.
The crime of “spoofing”, applicable to commodities trading, was created by the Dodd-Frank Act in 2010 (new section 4c(a)(5)(C) of the Commodity Exchange Act -- (7 U.S.C. § 6c(a)(5)(C)). (Termed “spoofing” in the new statute, it is also referred to as “layering”.) Basically, it is the placing of buy or sell orders for commodities with the intention that the orders will not be completed. The new law targets situations in which such orders are placed solely to affect market price and in the commodity, so that the person placing the orders then can benefit from the resulting price moves by conducting actual trades at the new prices.
The spoofing prohibition is one part of the larger targeting of “market manipulation”, also applicable (by other statutes) to the trading of stocks as well as to commodities.
In late 2016 the first spoofing case went to trial in Chicago against New Jersey resident, Michael Coscia, on twelve charges of spoofing and commodities fraud. (For each of six transactions targeted in the indictment, Coscia was charged with both spoofing, under 7 U.S.C. §§ 6c(a)(5)(C) and 13(a)(2), and criminal commodities fraud under 18 U.S.C. § 1348.) 1:14-CR-00551 (N.D. Ill). In a dramatic opening success for the Government, the jury took barely an hour to find Coscia guilty on all counts.
New indictments and cases followed the initial success. A few weeks ago the second case went to trial, this one against a UBS trader, Andre Flotron. 3:17-CR-00220 (D. Conn.). Equally dramatically, in that second trial the jury took not much longer than an hour to find Flotron not guilty. To complete the drama, just after the Flotron acquittal, the U.S. Supreme Court declined to consider Coscia’s appeal of his conviction.
Thus, the score is now 1 to 1 for the Government and defense, and the Supremes are not getting involved. Defense lawyers in future trials will be anxious to identify and utilize any lessons or strategies that may be available from these two opening trials.
LOCATION, LOCATION, LOCATION
A threshold issue for prosecutions such as these is venue (the location of bringing of a prosecution). The Constitution requires that a criminal prosecution be brought in the state where the crime or crimes were committed. That can be less easy to determine in “white collar” financial-crime cases, where the relevant conduct may be more complex and difficult to pin down in location. This can present more opportunities for defense counsel; and the first two spoofing cases show how that can matter.
Coscia, a New Jersey resident, was prosecuted in Chicago, because he conducted his trading activity at least in part through the Chicago Mercantile Exchange Group, located there. Flotron’s trading also was in Chicago. However, the federal Government prosecuted him not in Chicago but in Connecticut, where he lived. Consequently, his lawyers were able to get six of the seven charges against him (three spoofing counts and three commodities fraud counts) dismissed based on improper venue.
The only charge then remaining against Flotron was a conspiracy count. Conspiracy (agreement and coordination among two or more people to commit a crime) can be an offense separate from the actual crime that the persons conspired to commit. Often it is charged as a separate crime in the same indictment with, and in addition to, the underlying substantive crimes. A defendant can be convicted of conspiracy even if not convicted of the underlying charged crime—indeed, even if not charged with the underlying substantive crime. And conspiracy is a broadly defined crime that can be easier to convict on than the substantive crime.
But the dismissal of all charges but one against Flotron before his trial even began clearly was a substantial setback for the Government. It bears consideration whether the result might have been different for Flotron if the Government had prosecuted him in Chicago, like Coscia.
In any event, the point remains that “white collar” financial cases like these-- involving more complex activities, often less concrete and sometimes difficult to fix conclusively in location--- can present unique opportunities for venue challenges and other such litigation strategies that do not exist with other types of cases.
RELEVANT CONDUCT
However, beyond the procedural difference between the two cases, there also were important differences in the relevant conduct of the two defendants. Coscia employed complex computer algorithms in planning and effectuating his “spoof” trades, which automatically launched and cancelled large quantities of potential trades milliseconds apart. The program would place large and small orders simultaneously on opposite (buy and sell) sides of the market, in order to create an illusion of market activity. Those were followed quickly by actual trades, which produced gains to Coscia based on the price fluctuations attending (and the Government alleged, caused by) the “spoof” transactions.
In contrast, Flotron did not employ such complex, high-volume or extremely high-speed methods (nor any automated method at all). Instead, he acted through individuals who conducted manual trades for him. Those traders testified against him at trial after receiving non-prosecution guarantees from the Government. They alleged that he trained them how to effectuate the trades in order to effectuate the desired price fluctuations.
The fact that the persons who actually conducted the trades were given immunity in order to secure their testimony against their former principal, Flotron, made them vulnerable to cross-examination calling into question their motivations and truthfulness.
WHY IT MATTERS: INTENT
The most important consequence of these differences in underlying conduct involves the critical (and most difficult) issue in most “white collar” prosecutions: intent. The most important issue often is whether the defendant engaged in the targeted conduct from an intent to violate the law, or whether instead there were other, benign, non-criminal, business reasons for that conduct. “Spoofing” provides a good example of the problem and how it might be approached by defense counsel.
It turns out that a great majority of commodities orders are not completed after being placed. Most are cancelled before they are accepted and the transactions consummated. Therefore, the mere fact that a number of sell or buy orders are cancelled by the defendant before being accepted does not (or should not) be enough itself to show criminal intent. Such cancellations could as likely be just standard market practice; the way trading is done. And if a non-criminal explanation is as likely as a criminal one, then the Government will not have satisfied its burden in criminal cases of proving all elements of the charged crime (including criminal intent) beyond a reasonable doubt; and the prosecution therefore must fail.
Even with these considerations, it will be difficult to argue that conduct like that engaged in by Coscia (high-volume orders placed and instantly cancelled by complex computer algorithms; then followed quickly by actual (profitable) trades) is equally susceptible of benign explanation. In reference to the phrasing of the relevant statute, it will be difficult to argue that the person making such offers intended for them to be accepted or at least that he reasonably contemplated that they might be.
However, that argument will be more plausible with activities closer to those of Flotron: manual trades, placed by human traders, and not cancelled automatically milliseconds after being placed. Even the lapse of a minute before cancellation (which apparently was common with Flotron’s trading) creates a far different scenario in respect to this issue of intent. A minute may not be long, but it is a lot longer than a millisecond. It is at least possible that such orders could be accepted, which would militate against a finding beyond a reasonable doubt that the intent in placing them was for them never to be accepted.
These kinds of factual differences can be very consequential in cases turning on so inexact an issue as intent, as white-collar cases so often do. The attempt (by defense counsel and prosecutors) to place a particular defendant’s conduct closer to one or the other of these two current paradigms will be a significant part of litigation strategy in future cases of these types.
BEYOND COMMODITIES: SECURITIES MANIPULATION
While the Dodd-Frank spoofing provision applies to commodities trading, similar provisions apply similar rules to trading in stocks as well. For example, U.S. Code title 15 sections 78j(b), as implemented by regulations of the U.S. Securities and Exchange Commission, prohibits the use of “any manipulative device or contrivance” contrary to SEC rules “in connection with the purchase or sale of any security” (whether or not listed on a national securities exchange). Criminal as well as civil penalties are provided for such acts.
SEC rules promulgated pursuant to this statute (located in Part 240 of Title 17 CFR) create prohibitions that (circularly) largely track the statutory language. E.g., 17 CFR § 240.10b-5 forbids the use, “directly or indirectly”, of any “device, scheme or artifice to defraud”, and “any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person” “in connection with the purchase or sale of any security”, whether or not on a national exchange. Courts have sustained the SEC’s position that trades in securities violate these rules if they were engaged in for the purpose of affecting the price of a stock. E.g., United States v. Curshen, 567 Fed. App’x 815 (11th Cir. 2014).
One example of such conduct deemed to violate these provisions is the so-called “pump and dump” scheme, in which persons act in various ways to produce sale activity in a stock and to artificially inflate its price, and conduct lager trades in the stock before the price collapses. The idea is to create an appearance of price moves and trading volume being generated by market forces, and thereby to lure other persons to buy the stock at those or higher prices, when in fact the price and volume moves are not market-based but instead are only being created by the contrive “pump” activities.
For example, such persons may contrive and execute a campaign of “press releases” (perhaps over-hyping the “new developments” disclosed) followed by relatively small purchases of the stock by those persons solely for the purpose of giving an impression of market-based trading volume and increasing the bid and ask prices for the stock, to lure buyers to whom the organizers then will sell greater quantities at higher prices. An additional, related purpose of such purchases by the conspirators may be to drive “shorts” out of the stock, who have “un-covered” positions in the stock and otherwise would depress the stock by their short-sales of it.
As in the spoofing context, the critical issue in these stock-manipulation cases is the intent of the defendants in engaging in the targeted activities. Were those activities based on some true business plan or imperative; or were they instead undertaken for the purpose of affecting stock prices and trading volumes? Here too, the (jury) determinations on this issue will be substantially informed by the nature of the defendant’s conduct.
Did the defendant execute trades, or have them executed, in the names (under the accounts) of other persons than himself? Did he take other steps to disguise or mislead as to what persons were really behind the trading activity? Did he trade “on both sides” of the stock (buying and selling) more or less simultaneously (“wash trades”)? Did he direct buy or sell activities when knowing that essentially identical activities would simultaneously be engaged in from the opposite sides of the transactions, even if by other persons than himself (“matched trades”)? Did he, alone or with fellow conspirators, control all or a large percentage of the stock (the “float”) going into the trading activities? Did he use and/or direct the use of methods or items to prevent detection of the activities in question—e.g., “throw-away” phones”?
Such circumstances will make it much more difficult to defeat a showing of the all-important criminal intent (e.g., by convincing the jury that the defendants’ trading and related activities were not with the intent of affecting price or volume but instead were based solely on benign business purposes); just as Coscia’s algorithm-directed trades no doubt made such a showing difficult in his case. In sum, facts matter; including how they are presented and explained to a jury; under the new spoofing law as under the longer-standing manipulative trading rules for securities generally.
VICTIMS?
There is one possible significant difference between the “spoofing”/commodities cases and the “manipulation”/stock cases: victims. Usually in stock manipulation cases, some of the principal Government trial witnesses are the victims of the activities charges—generally, the persons who bought or sold stocks, to their financial detriment, in reliance on those activities of the defendant. Often these are small, individual investors or traders, particularly since many “pump and dump” operations are carried out in the over-the-counter market, in which small investors are more prevalent. Such witnesses often are offered early in the Government’s case and generate sympathy with juries.
However, such small investors are far less prevalent in commodities trading. There, the “victim” seller or buyer is more likely to be another professional, sophisticated trader, maybe even using his own algorithm-type strategies. This deprives the prosecution in such cases of the important weapon, from the stock fraud cases, of the sympathetic victim witnesses.
ON APPEAL: ENTER (NOT) THE SUPREMES
Finally, just a week ago, on May 14, and since the Flotron acquittal, Coscia’s appeal of his conviction reached the U.S. Supreme Court, which declined to hear it. While the Court summarily denied review, without opinion and thus without precedential value, it can be worthwhile to consider the grounds on which Coscia’s attorneys sought that appellate review. All those grounds were rejected by the Seventh Circuit Court of Appeals, 866 F.3rd 782 (2017), based on which rejection Coscia sought Supreme Court review.
No Unconstitutional Vagueness
First, Coscia argued and the Seventh Circuit rejected that the definition of “spoofing” in the Dodd-Frank statute is unconstitutionally vague. That definition is “bidding or offering with the intent to cancel the bid or offer before execution”. The Seventh Circuit held that this definition is not unconstitutionally vague (as to Coscia or as to anyone) and that the statute had provided adequate notice to Coscia of what conduct was prohibited. Similarly, Coscia argued, and for the same reasons above, the Circuit Court rejected, that the statute is broad enough to permit “arbitrary enforcement” on ad hoc and subjective bases. The Court stated that the statute applies only to persons who intend to cancel a commodities order before execution of it, at the time when they place the order, and that the statute could not be used to prosecute anyone who does not qualify within these terms.
Contrasting Other Common, Valid, Order Techniques
The Court also rejected the concern that the spoofing statute would apply to impose criminal liability on certain types or orders standard in trading practice: “stop-loss orders” (orders to sell a commodity (or stock) once it reaches a certain price) or “fill or kill orders” (an order that by its terms must be filled immediately in its entirety or is cancelled if not). The Court stated that these other common order types are different from spoof orders in that they are cancelled, if at all, only after the occurrence or non-occurrence of some subsequent event; whereas spoof orders are never meant to be filled from the time when they are placed.
CONCLUSION
Every case is different. It is difficult to generalize and extrapolate from one case, trial, jury, verdict, to others, even under the same statute, and especially across statutes. Certainly this is true with verdicts of first impression under a statute. But the spoofing statute can be viewed as an application to one context (commodities trading) of the broader prohibition against “manipulative practices in financial and trading transactions generally, with common terminology used among the context-specific statutes and regulations. Given this contextual unity, even the initial two trials under the new spoofing law can usefully be assessed for guidance in case evaluation and trial strategy (including in the respects mentioned here) not only for spoofing trials to come, but also for trials in the securities context. And vice versa.
__________
* ROGER C. WILSON represents clients in federal white-collar criminal cases involving allegations of financial fraud in a variety of areas, including securities fraud, bank fraud, and mortgage and loan fraud, both in trials and in the pursuit of resolutions short of trial.
A threshold issue for prosecutions such as these is venue (the location of bringing of a prosecution). The Constitution requires that a criminal prosecution be brought in the state where the crime or crimes were committed. That can be less easy to determine in “white collar” financial-crime cases, where the relevant conduct may be more complex and difficult to pin down in location. This can present more opportunities for defense counsel; and the first two spoofing cases show how that can matter.
Coscia, a New Jersey resident, was prosecuted in Chicago, because he conducted his trading activity at least in part through the Chicago Mercantile Exchange Group, located there. Flotron’s trading also was in Chicago. However, the federal Government prosecuted him not in Chicago but in Connecticut, where he lived. Consequently, his lawyers were able to get six of the seven charges against him (three spoofing counts and three commodities fraud counts) dismissed based on improper venue.
The only charge then remaining against Flotron was a conspiracy count. Conspiracy (agreement and coordination among two or more people to commit a crime) can be an offense separate from the actual crime that the persons conspired to commit. Often it is charged as a separate crime in the same indictment with, and in addition to, the underlying substantive crimes. A defendant can be convicted of conspiracy even if not convicted of the underlying charged crime—indeed, even if not charged with the underlying substantive crime. And conspiracy is a broadly defined crime that can be easier to convict on than the substantive crime.
But the dismissal of all charges but one against Flotron before his trial even began clearly was a substantial setback for the Government. It bears consideration whether the result might have been different for Flotron if the Government had prosecuted him in Chicago, like Coscia.
In any event, the point remains that “white collar” financial cases like these-- involving more complex activities, often less concrete and sometimes difficult to fix conclusively in location--- can present unique opportunities for venue challenges and other such litigation strategies that do not exist with other types of cases.
RELEVANT CONDUCT
However, beyond the procedural difference between the two cases, there also were important differences in the relevant conduct of the two defendants. Coscia employed complex computer algorithms in planning and effectuating his “spoof” trades, which automatically launched and cancelled large quantities of potential trades milliseconds apart. The program would place large and small orders simultaneously on opposite (buy and sell) sides of the market, in order to create an illusion of market activity. Those were followed quickly by actual trades, which produced gains to Coscia based on the price fluctuations attending (and the Government alleged, caused by) the “spoof” transactions.
In contrast, Flotron did not employ such complex, high-volume or extremely high-speed methods (nor any automated method at all). Instead, he acted through individuals who conducted manual trades for him. Those traders testified against him at trial after receiving non-prosecution guarantees from the Government. They alleged that he trained them how to effectuate the trades in order to effectuate the desired price fluctuations.
The fact that the persons who actually conducted the trades were given immunity in order to secure their testimony against their former principal, Flotron, made them vulnerable to cross-examination calling into question their motivations and truthfulness.
WHY IT MATTERS: INTENT
The most important consequence of these differences in underlying conduct involves the critical (and most difficult) issue in most “white collar” prosecutions: intent. The most important issue often is whether the defendant engaged in the targeted conduct from an intent to violate the law, or whether instead there were other, benign, non-criminal, business reasons for that conduct. “Spoofing” provides a good example of the problem and how it might be approached by defense counsel.
It turns out that a great majority of commodities orders are not completed after being placed. Most are cancelled before they are accepted and the transactions consummated. Therefore, the mere fact that a number of sell or buy orders are cancelled by the defendant before being accepted does not (or should not) be enough itself to show criminal intent. Such cancellations could as likely be just standard market practice; the way trading is done. And if a non-criminal explanation is as likely as a criminal one, then the Government will not have satisfied its burden in criminal cases of proving all elements of the charged crime (including criminal intent) beyond a reasonable doubt; and the prosecution therefore must fail.
Even with these considerations, it will be difficult to argue that conduct like that engaged in by Coscia (high-volume orders placed and instantly cancelled by complex computer algorithms; then followed quickly by actual (profitable) trades) is equally susceptible of benign explanation. In reference to the phrasing of the relevant statute, it will be difficult to argue that the person making such offers intended for them to be accepted or at least that he reasonably contemplated that they might be.
However, that argument will be more plausible with activities closer to those of Flotron: manual trades, placed by human traders, and not cancelled automatically milliseconds after being placed. Even the lapse of a minute before cancellation (which apparently was common with Flotron’s trading) creates a far different scenario in respect to this issue of intent. A minute may not be long, but it is a lot longer than a millisecond. It is at least possible that such orders could be accepted, which would militate against a finding beyond a reasonable doubt that the intent in placing them was for them never to be accepted.
These kinds of factual differences can be very consequential in cases turning on so inexact an issue as intent, as white-collar cases so often do. The attempt (by defense counsel and prosecutors) to place a particular defendant’s conduct closer to one or the other of these two current paradigms will be a significant part of litigation strategy in future cases of these types.
BEYOND COMMODITIES: SECURITIES MANIPULATION
While the Dodd-Frank spoofing provision applies to commodities trading, similar provisions apply similar rules to trading in stocks as well. For example, U.S. Code title 15 sections 78j(b), as implemented by regulations of the U.S. Securities and Exchange Commission, prohibits the use of “any manipulative device or contrivance” contrary to SEC rules “in connection with the purchase or sale of any security” (whether or not listed on a national securities exchange). Criminal as well as civil penalties are provided for such acts.
SEC rules promulgated pursuant to this statute (located in Part 240 of Title 17 CFR) create prohibitions that (circularly) largely track the statutory language. E.g., 17 CFR § 240.10b-5 forbids the use, “directly or indirectly”, of any “device, scheme or artifice to defraud”, and “any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person” “in connection with the purchase or sale of any security”, whether or not on a national exchange. Courts have sustained the SEC’s position that trades in securities violate these rules if they were engaged in for the purpose of affecting the price of a stock. E.g., United States v. Curshen, 567 Fed. App’x 815 (11th Cir. 2014).
One example of such conduct deemed to violate these provisions is the so-called “pump and dump” scheme, in which persons act in various ways to produce sale activity in a stock and to artificially inflate its price, and conduct lager trades in the stock before the price collapses. The idea is to create an appearance of price moves and trading volume being generated by market forces, and thereby to lure other persons to buy the stock at those or higher prices, when in fact the price and volume moves are not market-based but instead are only being created by the contrive “pump” activities.
For example, such persons may contrive and execute a campaign of “press releases” (perhaps over-hyping the “new developments” disclosed) followed by relatively small purchases of the stock by those persons solely for the purpose of giving an impression of market-based trading volume and increasing the bid and ask prices for the stock, to lure buyers to whom the organizers then will sell greater quantities at higher prices. An additional, related purpose of such purchases by the conspirators may be to drive “shorts” out of the stock, who have “un-covered” positions in the stock and otherwise would depress the stock by their short-sales of it.
As in the spoofing context, the critical issue in these stock-manipulation cases is the intent of the defendants in engaging in the targeted activities. Were those activities based on some true business plan or imperative; or were they instead undertaken for the purpose of affecting stock prices and trading volumes? Here too, the (jury) determinations on this issue will be substantially informed by the nature of the defendant’s conduct.
Did the defendant execute trades, or have them executed, in the names (under the accounts) of other persons than himself? Did he take other steps to disguise or mislead as to what persons were really behind the trading activity? Did he trade “on both sides” of the stock (buying and selling) more or less simultaneously (“wash trades”)? Did he direct buy or sell activities when knowing that essentially identical activities would simultaneously be engaged in from the opposite sides of the transactions, even if by other persons than himself (“matched trades”)? Did he, alone or with fellow conspirators, control all or a large percentage of the stock (the “float”) going into the trading activities? Did he use and/or direct the use of methods or items to prevent detection of the activities in question—e.g., “throw-away” phones”?
Such circumstances will make it much more difficult to defeat a showing of the all-important criminal intent (e.g., by convincing the jury that the defendants’ trading and related activities were not with the intent of affecting price or volume but instead were based solely on benign business purposes); just as Coscia’s algorithm-directed trades no doubt made such a showing difficult in his case. In sum, facts matter; including how they are presented and explained to a jury; under the new spoofing law as under the longer-standing manipulative trading rules for securities generally.
VICTIMS?
There is one possible significant difference between the “spoofing”/commodities cases and the “manipulation”/stock cases: victims. Usually in stock manipulation cases, some of the principal Government trial witnesses are the victims of the activities charges—generally, the persons who bought or sold stocks, to their financial detriment, in reliance on those activities of the defendant. Often these are small, individual investors or traders, particularly since many “pump and dump” operations are carried out in the over-the-counter market, in which small investors are more prevalent. Such witnesses often are offered early in the Government’s case and generate sympathy with juries.
However, such small investors are far less prevalent in commodities trading. There, the “victim” seller or buyer is more likely to be another professional, sophisticated trader, maybe even using his own algorithm-type strategies. This deprives the prosecution in such cases of the important weapon, from the stock fraud cases, of the sympathetic victim witnesses.
ON APPEAL: ENTER (NOT) THE SUPREMES
Finally, just a week ago, on May 14, and since the Flotron acquittal, Coscia’s appeal of his conviction reached the U.S. Supreme Court, which declined to hear it. While the Court summarily denied review, without opinion and thus without precedential value, it can be worthwhile to consider the grounds on which Coscia’s attorneys sought that appellate review. All those grounds were rejected by the Seventh Circuit Court of Appeals, 866 F.3rd 782 (2017), based on which rejection Coscia sought Supreme Court review.
No Unconstitutional Vagueness
First, Coscia argued and the Seventh Circuit rejected that the definition of “spoofing” in the Dodd-Frank statute is unconstitutionally vague. That definition is “bidding or offering with the intent to cancel the bid or offer before execution”. The Seventh Circuit held that this definition is not unconstitutionally vague (as to Coscia or as to anyone) and that the statute had provided adequate notice to Coscia of what conduct was prohibited. Similarly, Coscia argued, and for the same reasons above, the Circuit Court rejected, that the statute is broad enough to permit “arbitrary enforcement” on ad hoc and subjective bases. The Court stated that the statute applies only to persons who intend to cancel a commodities order before execution of it, at the time when they place the order, and that the statute could not be used to prosecute anyone who does not qualify within these terms.
Contrasting Other Common, Valid, Order Techniques
The Court also rejected the concern that the spoofing statute would apply to impose criminal liability on certain types or orders standard in trading practice: “stop-loss orders” (orders to sell a commodity (or stock) once it reaches a certain price) or “fill or kill orders” (an order that by its terms must be filled immediately in its entirety or is cancelled if not). The Court stated that these other common order types are different from spoof orders in that they are cancelled, if at all, only after the occurrence or non-occurrence of some subsequent event; whereas spoof orders are never meant to be filled from the time when they are placed.
CONCLUSION
Every case is different. It is difficult to generalize and extrapolate from one case, trial, jury, verdict, to others, even under the same statute, and especially across statutes. Certainly this is true with verdicts of first impression under a statute. But the spoofing statute can be viewed as an application to one context (commodities trading) of the broader prohibition against “manipulative practices in financial and trading transactions generally, with common terminology used among the context-specific statutes and regulations. Given this contextual unity, even the initial two trials under the new spoofing law can usefully be assessed for guidance in case evaluation and trial strategy (including in the respects mentioned here) not only for spoofing trials to come, but also for trials in the securities context. And vice versa.
__________
* ROGER C. WILSON represents clients in federal white-collar criminal cases involving allegations of financial fraud in a variety of areas, including securities fraud, bank fraud, and mortgage and loan fraud, both in trials and in the pursuit of resolutions short of trial.
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