The Expert's Examiner


USA v. Coscia, No. 14 CR 551 (N.D. Ill., 4/6/16)
August 5, 2019

While this one comes from the archives, it bears inclusion as giving great judicial guidance on an issue so often encountered by testifying experts: how to assist the factfinder without usurping her prerogatives. Defendant Michael Coscia was convicted after a jury trial on six counts of commodities fraud and six counts of spoofing. Federal Rules of Criminal Procedure permit a court to grant acquittal under Rule 29(a), when the evidence needed to sustain a conviction is insufficient. A motion for new trial may only be granted under Rule 32(a) when the verdict is against “the manifest weight of the evidence, taking into account the credibility of the witnesses.”

Mr. Coscia was a principal of a futures trading firm, the Court explains, and “implemented a high-frequency trading program that essentially enabled him to manipulate the commodities markets.” He did this through programmed trading that would place large orders and then immediately cancel them prior to execution. The presence of these orders would trigger reactions from other traders, move the market in a particular direction, and, through small orders strategically placed, Mr. Coscia would reap profits from the price moves.

The Government proceeded on a “pure inducement” theory, Mr. Coscia objects, aiming to establish that his large orders caused other market participants to trade in reaction. Defendant Coscia argues that proof of commodities fraud requires that the actual orders be “false” or “deceptive.” The Court reviews the indictment and finds that the Government’s allegations of intentionally misleading market participants about price and volume through the use of “sham quote orders” fulfills the statute’s requirements.

Defendant engages the Court on the issue of whether “actual deception” was fairly proved. He argues that many of his orders were filled, that he was at real risk, albeit for short periods (100 to 400 milliseconds). The Court finds, in contradiction, “substantial evidence” that “Coscia never intended to fill large orders....” It analogizes these “illusory” large orders to “wash trades,” an illegal and manipulative practice under the 1934 Act and finds the practice was both deceptive to other market participants and of a material nature in affecting their trading decisions.

Rule 704(b) of the Federal Rules of Evidence prohibit expert witnesses from opining on a criminal defendant's mental state, to the extent that mental state constitutes an element of the crime charged. An expert testifying for the Government, ­­­­­­­Professor Hendrik Bessembinder, was the subject of this challenge. He was asked by the Government to explain the Defendant's testimony regarding trading patterns. Bessembinder testified that “the only way that trading is generated in the electronic futures markets is through order submission. So if one is seeking to generate trading, seeking to generate a reaction, the only way one could do that is by inducing people to change their order submissions.” Following up on that testimony, the Government then asked the witness if he observed submitted evidence that coincided with that observation.

Professor Bessembinder's response:

Well, in particular, the high fill rates on the small orders. They were not only very high relative to the fill rates on the large orders, they are actually remarkably high for fill rates for other high frequency traders, so the high fill rates on the small orders are certainly very much consistent with the idea that the reaction that was generated was to induce other traders to submit orders to trade against, interact with the small orders.

Was this testimony tantamount to opining that Defendant had the criminal intent to manipulate the markets? The Court says "no," ruling that "[t]his testimony fell safely within Rule 704(b)’s limitations.... [H]e stated, as an expert witness, his belief that the data in evidence differentiated Coscia’s trading patterns from that of other high-frequency traders.... Bessembinder did not testify that Coscia intended to deceive the market or intended to cancel orders; the testimony did not implicate intent as to any element of the crime charged."

Download opinion