Legitimacy of "Spoofing" Prosecution Questioned
Commentary by Bob Zwirb
In a blog post titled "Is This Prosecution a Spoof of a Real Manipulation Case?" University of Houston finance professor Craig Pirrong questions the legitimacy of "spoofing" as an allegation in a criminal case involving the trading practices of Michael Coscia.
The indictment represents the first criminal case to use the anti-manipulation authority provided in the Dodd-Frank Act to charge spoofing in the context of commodities transactions. Coscia is calling for a dismissal on the grounds that the language in Dodd-Frank regarding spoofing is "hopelessly vague."
According to Mr. Pirrong, this is the "obvious argument to make," since spoofing is, indeed, a "vague allegation." Mr. Pirrong compares the case to the BP propane criminal case heard in Houston in 2009, in which U.S. District Court Judge Miller declared that the anti-manipulation language of the CEA was "unconstitutionally vague." Mr. Pirrong stated that it will be "quite interesting to see whether the DOJ fares better now in a Chicago courtroom than it did in Houston in 2009."
See: "Is This Prosecution a Spoof of a Real Manipulation Case?" by Craig Pirrong.
Related news: First Criminal Prosecution for Spoofing (with Cadwalader Memorandum) (October 7, 2014); Energy Metro Desk Article Discusses Criminal Charge of Spoofing (October 20, 2014).
Commentary
Dodd-Frank added to the CFTC's enforcement arsenal the authority to go after certain disruptive practices, including conduct that "is of the character of, or is commonly known to the trade as, 'spoofing.'" The statute defines that term in a parenthetical as "bidding or offering with the intent to cancel the bid or offer before execution." See CEA Section 4c(a)(5). A spoofing scheme – the kind with which the government is concerned – is designed to mislead the market regarding either the size of an order or the true price of a bid or offer to sell. As soon as others act on that bid or offer, the spoofer then pulls the order.
Traders post bids and offers all the time without necessarily expecting that those bids and offers will be executed. The problem is that the act of placing orders and canceling them can encompass both legitimate and illegal market behavior. As with traditional forms of manipulation, proof of intent is important in distinguishing between the two. However, the line between the two is inherently vague, notwithstanding the issuance of guidance from the CFTC. For active traders, especially algorithmic traders, this is an area fraught with uncertainty.