United States v. Michael Coscia
United States Court of Appeals for the Seventh Circuit
866 F.3d 782 (2017)
In 2010, in enacting the Dodd-Frank Act, Congress made it unlawful for any person to engage in any trading “commonly known to the trade as ‘spoofing.’” Though the term spoofing was not given a separately codified definition, it was defined in a parenthetical as “bidding or offering with the intent to cancel the bid or offer before execution.” In October 2014, the United States (plaintiff) indicted Michael Coscia (defendant) for spoofing and commodities fraud based on Coscia’s trading activity throughout 2011. The evidence at trial indicated that Coscia had combined high-frequency trading with efforts to artificially influence the market prices of certain commodities. Coscia allegedly did this by placing large and small orders on opposite sides of the then-current market price. If Coscia wanted to make a purchase, he would push the market price lower by making large-volume bids at successively lower market prices. Coscia placed a small bid at the lower price point. The large orders were typically canceled within milliseconds of being placed. When Coscia wanted to place a sell order, the same process was used in reverse, with the large orders increasing toward a smaller order above the then-current market price. Once the desired price was reached, Coscia used high-frequency trading to make the small purchases, and he then repeated the sequence thousands of times. To implement this scheme, Coscia allegedly commissioned the design of two computer programs, known as Flash Trader and Quote Trader. The programmer was instructed to make the programs act as a “decoy” that can be “[u]sed to pump [the] market.” The program was designed to prevent the fulfillment of the large orders under three circumstances: (1) the passage of a brief amount of time; (2) partial filling of the large orders; or (3) complete fulfillment of the small orders. Coscia was convicted by a jury. Coscia then filed a motion for acquittal, arguing that the antispoofing provision in the Dodd-Frank Act was void for vagueness. The federal district court denied his motion for acquittal, and Coscia appealed to the United States Court of Appeals for Seventh Circuit. On appeal, Coscia argued that the statute’s language did not give adequate notice of what spoofing meant, that the legislative history supplied no indication of the meaning, and that the parenthetical in the statutory definition encouraged arbitrary enforcement because many high-frequency traders canceled orders before they were fulfilled.
Rule of Law
Holding and Reasoning (Ripple, J.)
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