Roy Strom , The National Law Journal
Financial trader Michael Coscia was sentenced Wednesday in Chicago to three years in prison for “spoofing,” providing the first glimpse of the teeth behind an anti-manipulative trading law passed in 2010.
Prosecutors hailed the prison term in the first criminal spoofing case as a signal that commodities markets are fair, and they want the punishment to serve as a deterrent to future manipulative trading. Coscia’s defense lawyers at Dentons and Kobre & Kim promised to appeal the conviction and challenge the law, which defines “spoofing” as the placement of an order to buy or sell futures contracts without the intent to execute the trade.
“Whether you do it in slow motion on a trading floor or using technology, fraud is fraud,” U.S. Attorney Zach Fardon told reporters after the hearing. “We will find you. We will prosecute you.”
The 2010 Dodd-Frank Act made spoofing a criminal offense, and judges are grappling with the fallout. On Tuesday afternoon, a Chicago federal judge issued a 99-page opinion denying an attempt by regulators to bar trader Igor Oystacher from making trades while his civil spoofing case proceeds to trial.
And so it was a bittersweet day for the legal team that represents Coscia and Oystacher: Dentons’ Stephen Senderowitz and Kobre & Kim’s Michael Kim.
A jury convicted Coscia of six counts of spoofing and six counts of fraud after deliberating for about an hour following a November trial. Coscia was represented at trial by a team of Sullivan & Cromwell attorneys.
U.S. District Judge Harry Leinenweber departed from the government’s sentencing guidelines of 70 to 87 months. Leinenweber cited Coscia’s age, poor health and the government’s difficulty proving that the $1.4 million he made from his illegal trading was actually other traders’ losses. Coscia’s defense argued for probation.
At trial, prosecutors relied heavily on an algorithm Coscia had designed as evidence of his intent to cancel trades and move market prices in his favor. The algorithm was allegedly designed to cancel large trades on one side of the market before placing smaller orders on the other side. The tool ultimately helped him buy lower and sell higher on thousands of trades.
In issuing his sentence, Leinenweber noted that Coscia made up to three times more money than normal when his algorithm was in place for 11 weeks.
“It’s hard to see any reason for doing that other than greed,” Leinenweber said. “He wanted more money.”
Senderowitz declined to comment following the sentencing, other than to say the defense would file a motion for bond pending an appeal within 21 days.
The other high-profile spoofing defendant in Chicago, Oystacher, is accused of a much different scheme. He is alleged to have used a mouse and keyboard to manually place and cancel large orders that were designed to bait traders to move prices in his favor.
U.S. District Judge Amy St. Eve partially relied on that manual aspect of his trading to deny the Commodities Futures Trading Commission a request to bar Oystacher from trading while he awaits a trial in the winter.
The trading ban was not needed because of limits his company’s chief operating officer has imposed on Oystacher’s trading that rule out spoofing, St. Eve wrote. She required the defense team to submit proof those trading limits remain in place as the case goes forward.
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