United States v. Michael Coscia
2017 U.S. App. LEXIS 14508
| 7th Cir. | 2017Background
- Michael Coscia used two algorithmic programs (Flash Trader and Quote Trader) in 2011 to place rapid sequences of small tradable orders and large opposite-side orders that were routinely cancelled, executing a pattern repeated tens of thousands of times across exchanges.
- The scheme ran about ten weeks, produced over 450,000 large orders, and yielded approximately $1.4 million in profit; large orders were canceled within milliseconds under programmed conditions (time, partial fill, or small-order fill).
- Prosecutors charged Coscia with violating the Dodd–Frank anti‑spoofing provision (7 U.S.C. § 6c(a)(5)(C)) and commodities fraud (18 U.S.C. § 1348(1)); a jury convicted him on all counts and the district court sentenced him to 36 months’ imprisonment plus a 14‑point guidelines loss enhancement.
- Coscia appealed, arguing the anti‑spoofing statute is unconstitutionally vague, the spoofing and commodities‑fraud convictions were unsupported by sufficient evidence, the materiality jury instruction was incorrect, and the sentencing loss enhancement was improper.
- The Seventh Circuit affirmed: it held the statutory parenthetical adequately defines spoofing, Coscia’s intent to cancel was proven circumstantially by trading patterns and program design, the commodities‑fraud instruction and verdict were proper, and substituting Coscia’s gain for victims’ probable loss for sentencing was reasonable given the transactional complexity.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Vagueness of anti‑spoofing statute | Coscia: parenthetical and quotation marks make the term ambiguous; industry/agency guidance lacking | Statute’s parenthetical defines spoofing; intent element limits arbitrary enforcement | Statute not void for vagueness; gives fair notice and requires specific intent to cancel at time of order placement |
| Sufficiency of evidence for spoofing conviction | Coscia: orders were executable and cancellations common in HFT; no proof of intent to cancel at placement | Government: program design, cancellation rules, anomalous cancellation and order‑to‑trade ratios, and witnesses show intent to cancel | Evidence sufficient; circumstantial proof supported finding of present intent to cancel |
| Commodities‑fraud (§ 1348) conviction and materiality instruction | Coscia: conduct not deceptive as a matter of law; court should have used a different materiality formulation | Government: scheme created illusory market movement; victims and experts testified the conduct influenced trading decisions | Verdict upheld; instruction acceptable (borrowed from mail/wire fraud pattern) and conduct was material under any applied standard |
| Sentencing loss enhancement (gain as proxy for loss) | Coscia: futures markets/hedging make gain an unreliable proxy; loss not reasonably calculable | Government: multiple documented losses, many counterparties, and logistical difficulties make gain a reasonable proxy for probable loss | Enhancement affirmed; substituting defendant’s gain for loss reasonable given complexity and inability to calculate exact victim loss |
Key Cases Cited
- Johnson v. United States, 135 S. Ct. 2551 (2015) (vagueness doctrine and fair‑warning principle)
- Welch v. United States, 136 S. Ct. 1257 (2016) (vagueness standard for criminal statutes)
- Lanier v. United States, 520 U.S. 259 (1997) (statute must make criminality reasonably clear)
- Holder v. Humanitarian Law Project, 561 U.S. 1 (2010) (limitations on vagueness challenges outside First Amendment context)
- United States v. Aleynikov, 676 F.3d 71 (2d Cir. 2012) (background on high‑frequency trading and algorithmic execution)
- United States v. Leach, 639 F.3d 769 (7th Cir. 2011) (standard of review for constitutional challenges)
- United States v. Khattab, 536 F.3d 765 (7th Cir. 2008) (sufficiency‑of‑evidence review standard)
- United States v. Vitek Supply Corp., 144 F.3d 476 (7th Cir. 1998) (when defendant’s gain may be a reasonable proxy for victim loss)