Bridging the Week by Gary DeWaal: September 29 to October 3 and 6, 2014 (Market Disruption; When Is Enough Enough; Pay to Play; Money for Mom)

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Published Date: October 05, 2014

Last week, conduct of the nature of spoofing was the focus of a surprising criminal indictment in Chicago, Illinois and the settlement of a complaint brought by the Commodity Futures Trading Commission charging attempted manipulation. The CFTC was also involved in a host of other litigation developments, including a court's ruling in an enforcement action against the New York Mercantile Exchange for the alleged disclosure of nonpublic customer and trade data by two ex-employees.

As a result, the following matters are covered in this week’s Bridging the Week:

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NJ-Based Trader Previously Sanctioned by UK FCA, CFTC and CME Indicted in Chicago for Same Spoofing Offenses

New Jersey resident Michael Coscia, the prior manager and sole owner of Panther Energy Trading LLC, was indicted in Chicago last week for alleged spoofing activities involving futures traded on CME Group and ICE Futures Europe from August through October 2011.

The Commodity Futures Trading Commission, the UK Financial Conduct Authority and the Chicago Mercantile Exchange previously brought enforcement proceedings in July 2013 and entered into simultaneous settlements with Mr. Coscia and Panther related to this same conduct, assessing aggregate sanctions in excess of approximately US $3 million and various trading prohibitions. The CME also required disgorgement of US $1.3 million of trading profits. (Click here to access more information on these civil enforcement actions in the article “CFTC, UK FCA and CME File Charges and Settle With Proprietary Trading Company and Principal for Spoofing” in the July 22, 2013 edition of what is now known as Between Bridges.)

According to the indictment, during the relevant time, Mr. Coscia utilized two computer-driven algorithmic trading programs that repeatedly placed small buy or sell orders in a market, followed by the rapid placement and retraction of large orders—so called “quote orders”—on the opposite side of his small orders. He supposedly did this in order to deceive the market and help ensure the execution of his small orders at favorable prices.

After the initial small orders were executed, Mr. Coscia would reverse the process—placing new small orders on the opposite side of the market as his initial filled orders and large quote orders on the opposite side of the new small orders. He allegedly traded this way in order to ensure the fills of the new small orders and profits on the overall transaction.

The indictment claimed that, as part of his “scheme,” Mr. Coscia,

[d]esigned his programs to cancel the quote orders within a fraction of a second automatically, without regard to market conditions, even if the market moved in a direction favorable to the quote orders. Coscia programmed the quote orders to cancel quickly and automatically because he did not intend for the quote orders to be filled when he entered them, but instead intended to trick other traders into reacting to the false price and volume information he created with his fraudulent and misleading quote orders.

The indictment alleges that, in connection with his unlawful activity, Mr. Coscia traded overall 17 different CME markets and three different ICE Futures Europe markets, including gold, foreign exchange and soybean oil futures contracts. Mr. Coscia made over US $1.5 million as a result of his trading activity, claims the indictment.

Mr. Coscia’s indictment alleges six counts of commodities fraud and six counts of spoofing that relate solely, however, to six discrete trading episodes which, in total, allegedly netted Mr. Coscia US $1,070 in profits.

Spoofing was expressly prohibited in 2010 by amendments to relevant law enacted as part of the Dodd-Frank reforms. This is the first case brought by the US Attorney’s Office in Chicago under this new law.

The CME Group also recently enacted a new rule expressly prohibiting certain disruptive trading practices. (Click here to see an overview of these new rules in “CME Group Issues New Rule Regarding Disruptive Trading Practices” in the September 4, 2014 edition of Between Bridges.)

Mr. Coscia faces substantial prison time and fines if convicted—25 years for each count of commodities fraud and 10 years for each count of spoofing.

The US Attorney’s Office in Chicago established a Securities and Commodities Fraud Section earlier this year “dedicated to protecting markets and preserving investors’ confidence.”

My View:  Whatever the merits of this action, a major policy concern is the chilling effect the knowledge of impending or likely criminal charges will have on persons eager to settle their exchange or government-driven civil enforcement matters and move on. Here, Mr. Coscia not only paid a substantial penalty for his actions, he disgorged most of his profits and agreed to trading prohibitions—thus substantially impacting his future livelihood. If the purposes of criminal sanctions are to act as a deterrent, punish individuals and encourage the rehabilitation of wrongdoers, it is not clear what the incremental benefit of imposing additional penalties in this criminal action may be. Moreover, it is also not clear how this effectively redundant legal proceeding (albeit a criminal action with the prospect of incarceration) related to just a very small portion of Mr. Coscia’s alleged overall wrongful conduct (US $1,070 of US $1.5 million of total profits) justifies the expenditure of limited tax dollars—other than to generate dramatic headlines. These musings are not to condone illicit conduct—which should be appropriately punished—but solely to ask: when is enough enough?

And briefly:

Compliance Weeds: This case provides a good example that the prosecution of market disruption cases is nothing new for the CFTC or exchanges. This case also demonstrates that it is a misnomer to believe that market disruption may only be caused by so-called high-frequency traders. Here, the alleged spoofing-type transactions were placed manually, not by a machine. All Dodd-Frank’s new prohibited trading practices and the new CME Group rules proscribing certain disruptive trading practices have done is to provide the CFTC and the CME with new tools to prosecute conduct that formerly was seen by the CFTC as a form of manipulation or attempted manipulation, and by the CME as a violation of just and equitable principles of trade or similar catch-all provisions. (Click here to see a discussion of some recent cases brought by the CME based on old facts, which if brought today likely would have been brought under its disruptive trading practices prohibition in the article “Important Reminders Resonate From Recent CME Group and ICE Futures U.S. Disciplinary Actions in the September 22 to 26 and 29 edition of Bridging the Week.)

Totally Irrelevant (But Is It?): One of the best lead sentences in any news story I have seen in a long time was Silla Brush’s opening line in his article regarding this matter that appeared on on September 30: “If a U.S. regulator has its way, Daniel Shak will soon have more time to focus on gambling at poker tables and none at all to spend betting on derivatives.” Mr. Brush previously had discovered that Mr. Shak was a competitor in the World Series of Poker where he has earned more than US $700,000. (Click here to see Mr. Brush’s full article.)

And even more briefly:

Compliance Weeds: I have always found examinations guidance by any regulator helpful to better anticipate what might be asked by my own company’s regulator—even if not precisely relevant. This is especially the case for areas where there are not necessarily specific requirements (for example, information technology). However, even where there are specific rules, seeing what another regulator identifies as the priority concerns (for example, anti-money laundering) is useful.

For more information, see:

Bank of America Agrees to US $7.65 Million SEC Fine to Settle Charges for Misstatement of Regulatory Capital:

CFTC Extends Duration of Previously Granted No-Action Relief Regarding Package Transactions and Certain CDS Clearing-Related Swaps:

CFTC Obtains Consent Order Imposing US $1.56 Million Penalty on Eric Moncada for Attempting to Manipulate Wheat Futures:

See also, US CFTC v. Eric Moncada et al. (Default Order Against BES Capital and Serdika LLC):

CFTC Seeks to Bar Admitted Embezzler and His Company From Registration After He Allegedly Fails to Disclose Crimes on His Registration Application:

CFTC Sanctions Trader for Pre-Arranged Trading That Resulted in Profits to Mom:

See also, CME Group Disciplinary Action In the Matter of Fan Zhang:

Court Rejects NYMEX Claim It Can’t Be Liable to CFTC for Improper Disclosure of Nonpublic Information by Ex-Employees:

See also US CFTC v. William Byrnes et al:

DC Court Dismisses Challenge to SEC Restrictions on Asset Managers’ Political Contributions:

ESMA Begins Consultation on Standards for FX Nondeliverable Forwards Clearing and Proposes Start Dates for Interest Rate Swaps Clearing:

FX NDF Clearing Consultation:
Draft Technical Standards: Interest Rate Swaps

ESMA Updates AIFMD Q&As Regarding Reporting Obligations and Delegation of Portfolio and/or Risk Management:

ICE Futures U.S. Proposes to Extend Time of Precious Metals and Currency Block Trades:

See also: ICE Exchange Notice re: Minimum Block Trade Quantities for Currency Pairs and Precious Metals Contracts:

MFA Offers Recommendations to Improve Equity Market Structure, Including Increasing Disclosure and Transparency:

NFA Issues Reminder Regarding Timely Filing of CPO and CTA Forms and Amends Form PQR:

See also: Details Regarding Changes to Form PQR

NJ-Based Trader Previously Sanctioned by UK FCA, CFTC and CME Indicted in Chicago for Same Spoofing Offenses:

OCC Publishes Guidance Regarding Examinations of US-Based Agencies and Branches of Foreign Banking Organizations:

Trader Sued by CFTC for Violating Voluntary Agreement Not to Trade Futures Contracts During Closing Periods:

US Options Clearing Houses and Exchanges Announce New Risk Control Standards:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of October 4, 2014. No representation or warranty is made regarding the accuracy of any statement or information in this article. Also, the information in this article is not intended as a substitute for legal counsel, and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The impact of the law for any particular situation depends on a variety of factors; therefore, readers of this article should not act upon any information in the article without seeking professional legal counsel. Katten Muchin Rosenman LLP and/or Gary DeWaal may represent one or more entities mentioned in this article. 

Quotations attributable to speeches are from published remarks and may not reflect statements actually made.

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Gary DeWaal

Gary DeWaal is currently Special Counsel with Katten Muchin Rosenman LLP in its New York office focusing on financial services regulatory matters. He provides advisory services and assists with investigations and litigation.

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