(Bloomberg) — Commodities trader MichaelCosciawas found guilty in a major victory for the government in its first test of a criminal spoofing law.
The jury of eight men and four women deliberated for about an hour before finding the 53-year-old head of Panther Energy Trading LLC guilty on the spoofing charges. The Chicago trial was widely watched by lawyers and trading firms as the first time a jury weighed a Dodd-Frank Act provision that singles out spoofing as a form of illegal market manipulation.
Tuesdays conviction is likely to embolden prosecutors to go on the offensive after a year of heightened civil enforcement by the Commodity Futures Trading Commission. The 2010 Dodd-Frank Act made the practice illegal and set an easier standard of proof to try cases.
That may prove decisive as U.S. authorities pursue extradition of a U.K. trader accused of helping cause the 2010 flash crash and a lawsuit against a Chicago trader who was fined $660,000 for spoofing by three of the worlds largest futures markets. They too are accused of systematically placing orders they didnt intend to execute to trick the market into thinking there was demand that didnt actually exist.
Surprising Speed
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, said Cliff Histed, who was familiar with the case as a federal prosecutor before leaving for private practice. Going forward, 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.
Prosecution witnesses from two exchanges showed data on how large orders placed byCosciawere frequently canceled, while smaller orders he placed were canceled at a far lower rate. Those large orders were placed only to manipulate the market and move prices soCosciacould make money on the other side of the trade, prosecutors said. They claimed he made an illegal profit of about $1.4 million in a bait-and-switch scheme over three months.
Jurors left the federal courthousewithout commenting after findingCosciaguilty of six counts of commodities fraud and six counts of spoofing. When sentenced,Cosciafaces as long as 25 years in prison on the most serious counts.
Gold, Soy Beans
Prosecutors focused on six transactions, all from 2011, in the gold, euro, soybean meal, soybean oil, British pound, and copper futures markets. In total, these trades resulted in a profit of $1,070, according to the testimony. Prosecutors saidCosciaconducted thousands of such trades.
Coscias trading showed that he would first place a small order and then large orders on the other side of the market that were subsequently canceled after he executed smaller trades, according to testimony by Federal Bureau of Investigation special agent Brent Potter.
Computer programmer Jeremiah Park testified about trading algorithms he created under Coscias direction. Those programs included quote orders designed to pump up market, according to Parks notes that were shown in court. The quote orders were to stimulate the market to get a reaction, Park testified.
Steven Peikin, one of Coscias lawyers, argued that high- frequency traders routinely canceled orders. He told the jury that Coscias trading strategy was unique but not illegal.
Coscias Testimony
Cosciatestified that he didnt do anything wrong and repeatedly said he intended to trade on every order he placed. He also said he traded a lot of large orders he placed. He was asked whether he fraudulently induced other market participants to react to the deceptive market information he created.
I didnt induce anyone,Cosciasaid. Theres no deceptive market information either.
In 2013,Cosciasettled civil claims by the U.S Commodity Futures Trading Commission by paying a $2.8 million fine and consenting to a one-year trading ban. The judge didnt allow prosecutors to tell jurors about the settlement.
U.S. prosecutors are seeking to bring to Chicago the trader facing charges over the May 2010 flash crash that temporarily wiped out almost $1 trillion from the value of U.S. equities. Navinder Singh Sarao is fighting extradition from the U.K.
In October, the Commodity Futures Trading Commission sued Chicago-based trader Igor Oystacher and his firm 3Red Trading LLC for spoofing over 51 trading days.
Cosciagrew up in Brooklyn, New York. His father was a subway token clerk and he was the first in his family to go to college.During the day he was a mail carrier and went to Brooklyn College at night and graduated with a business management degree in 1986. He has been married for 25 years and his son attends the University of Michigan.
He testified that he first became interested in the markets after his father bet on a horse race and turned a $2 bet into a $55,000 winner. His father put the profit in the market andCosciatracked his fathers investments, sparking his interest in finance.
Cosciahad a cousin who worked on the floor of the New York Mercantile Exchange and thats how he got started on the floor, beginning as a clerk.He was a trader for 27 years.
The case is U.S. v.Coscia, 14-cr-00551, U.S. District Court, Northern District of Illinois (Chicago).
