In the 1920s a group of investors, known as the Radio Pool, traded among themselves in the stock of Radio Corporation of America, the tech company of the day. They succeeded in driving up the price, took their gains and left other investors to cope with falling prices when the pool withdrew its artificial support. In a 1934 report, the United States Senate committee investigating securities trading practices found the operations of the Radio Pool and others like it troubling:

​The testimony before the Senate Subcommittee again and again demonstrated that the activity fomented by a pool creates a false and deceptive appearance of genuine demand for the security on the part of the purchasing public and attracts persons relying upon the misleading appearance to make purchases. By this means, the pool is enabled to unload its holdings upon an unsuspecting public.1

​On August 7, 2017, a federal appeals court in Chicago affirmed the conviction of a trader for spoofing and commodities fraud based upon a scheme, carried out through a computer algorithm, designed to manipulate market prices and mislead other market participants by creating the illusion of market movement. Sound familiar? The case is United States v. Coscia2.

​Michael Coscia employed a trading program through which he placed large and small orders on the opposite sides of the market, in each case the small order at the desired price, and large order designed to shift the market towards the price at which the small order was listed. Here’s how the system worked in connection with Coscia’s trading of copper futures.

​Coscia placed a sell order for five contracts at the price of $327.55,3 which was higher than the market price at the time. He then placed orders many times larger on the opposite side of the market at steadily increasing prices, which started at $327.40 and grew incrementally to $327.50. These buy orders created the illusion of market movement, increasing the perceived (but illusory) value of any given futures contract and allowing Coscia to sell his current contracts at $327.55, a price that he created. The buy orders were immediately cancelled.

​Having sold five contracts for $327.55, Coscia now needed to buy the contracts at a lower price in order to make a profit. He therefore placed an order to buy five copper futures contracts for $327.50, which was below the price that he had just created. Coscia then placed large-volume orders on the opposite side of the market, priced at $327.70 and then $327.65, which created downward momentum, fostering the appearance of orders at incrementally decreasing prices and allowing Coscia to fill his small orders at the deflated price of $327.50. The large orders were then immediately cancelled. Coscia repeated the process tens of thousands of times, resulting in profits of $1.4 million over a period of weeks.

​The investors in the Radio Pool spent months or even years distorting the price of RCA by creating the appearance of demand and market movement. Coscia accomplished the same thing in two-thirds of a second.

​At his trial, perhaps the most damning evidence of Coscia’s intent came from the designer of his computer program, who testified that Coscia asked him to create a program that acted “like a decoy,” which could be “used to pump the market.” The large orders would be cancelled after the passage of time or if they were partially filled or if the small orders were completely filled. Pressed for an explanation of his system at a deposition taken by the Commodity Futures Trading Commission, Coscia simply answered, “That’s just how I programmed it. I don’t give it much thought beyond that.“

​There was also circumstantial evidence of Coscia’s intent. His order-to-fill ratio (the average size of his total orders divided by the average size of orders he filled) was 1.6%. The ratio for other traders ranged between 91% and 264%.

​The jury convicted Coscia of violating the anti-spoofing provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act4, which prohibits a bid or offer with the intent that it be cancelled before execution, and commodities fraud under a statute5 which makes it a crime “to defraud any person in connection with any commodity for a future delivery.” Coscia was sentenced to thirty-six months’ imprisonment followed by two years’ supervised release.

​The Coscia case has been described as a landmark, and we think rightly so, because it represents an affirmance of the first conviction under Dodd-Frank’s anti-spoofing provision. But there may be a bigger story here. Coscia was also convicted of garden variety commodities fraud under a statute on the books prior to Dodd-Frank, which suggests that at least one jury and one court are prepared to say spoofing is simply a category of commodities fraud.

​Wholly apart from the question of whether what he did met the technical requirements of spoofing, Coscia’s fraudulent intent was proved because he employed a system that used large orders to artificially inflate or deflate prices and shift market equilibrium in a direction and velocity he chose. When the expected market reaction was achieved and profits taken in the “real” portfolio, the larger market distorting orders would be cancelled. Coscia would have been convicted even if Dodd-Frank contained no anti-spoofing provision. It was the very nature of the system he designed which established his fraudulent intent.

​The history of market manipulation follows a straight line from the crude attempted corners by Jay Gould in the 19th century to the pools of the 1920s to the programming of algorithms to “pump” the market today. The difference is that the corners and pools were legal in their day. Things have changed, and so have the proofs of fraud.

​Convictions for fraud in the financial markets have often been difficult because they require proof of intent. But that proof seems surprisingly obvious in Coscia’s case. The evidence supporting the existence of fraudulent intent, which the Court described as “substantial,” was contained in the very computer program Coscia designed, which he intended to put out decoys to create the illusion of market movement.

​For us, one interesting question is what effect the Coscia decision will have on high speed trading in general. What of the other kinds of high frequency trading programs, where ultrafast computers allow traders to get a look at the bids and offers of other market participants and trade ahead of them, contain evidence of fraud? We’ll see.


1 Report for the Committee on Banking and Currency Pursuant to S.Res.84 (72nd Congress, at 32 (June 8, 1934).

2 31 2017 U.S. App. LEXIS 14508 (7th Cir. August 7, 2017).

3 The tick size for copper futures is one-half and one-thousandth of a cent. Numerical measurements of five represent one tick.

4 7 U.S.C. 6c(a).

5 18 U.S.C. 1348(1).


A series of “sensational congressional investigations” in the 1860s led to the disclosure that the United States had been bilked by war time contractors who charged for nonexistent or worthless goods, billed exorbitant prices for goods delivered and generally stole from the country in supplying the necessities for fighting the Civil War1. The result was the passage of the False Claims Act (“FCA”),2 which imposes significant civil and criminal penalties on those who defraud the government. Since passage of the FCA in 1863, Congress has repeatedly amended the law, but the FCA has always targeted those who present or directly induce false or fraudulent claims for payment by the United States.

The FCA permits persons who are not affiliated with the government to file actions against federal contractors or those receiving federal funds alleging a violation of the law and to receive a portion (up to 30%) of any damages they recover on the government’s behalf. Such persons are commonly referred to as “whistleblowers.”

Two such whistleblowers, Paul Bishop and Robert Kraus, sought damages for the United States under the FCA from Wells Fargo in connection with improper activities allegedly engaged in by Wachovia and World Savings Bank. Both banks were acquired by Wells Fargo along with their assets and liabilities.

Kraus claimed that Wachovia hid loans from internal and regulatory review by moving them from the bank’s balance sheet to an entity account for which insiders at the bank had a colorful name, the “Black Box.” Kraus claimed the Black Box contained $6,000,000,000 in loans and other assets, amounting to almost 13% of Wachovia’s total equity. Wachovia, Kraus contended, deceived federal entities, including the Federal Reserve, when the bank sought financial support as a result of the Great Recession. According to Bishop, World Savings also made misleading statements about the quality of the loans in its portfolio.

Both Kraus and Bishop claimed that the banks had misrepresented their financial health and defrauded the government by falsely certifying that they were in compliance with various banking regulations when they borrowed at favorable rates from the Federal Reserve’s discount window. What their claims did not allege was that the banks had violated any explicit precondition for the loans.

In a decision affirming the trial court’s dismissal of the case, the United States Court of Appeals for the Second Circuit found that nothing Kraus and Bishop alleged directly addressed any preconditions the Fed places on loans at its discount window. Instead, what they charged was general regulatory non-compliance, which the FCA was not designed to police.

The Court therefore rejected all of the legal theories the two advanced, including one known as the “implied false certification” theory of liability. That theory, which courts had dealt with in various ways over the years, treats the request that the government make a payment as a claimant’s implied certification of compliance with statutes, regulations and contract requirements that the government would consider a material condition of payment. Failure to disclose a violation of such a requirement, the theory goes, is a misrepresentation that renders the claim false or fraudulent and therefore actionable under the FCA.3

In a brief order, the United States Supreme Court reversed the Second Circuit4. The Court directed reconsideration in light of a decision it reached in June 2016, Universal Health Serv., Inc. v. United States ex rel. Escobar. In that matter, the Supreme Court found that a Medicaid provider, a mental health facility, was liable under the FCA because it had received payment from the government for services provided by unlicensed, unqualified and unsupervised personnel. While those things were not an explicit precondition of reimbursement, failure to disclose them constituted fraud. The Court found that, had the government known of the deficiencies, which were violations of Medicaid regulations, it would not have paid for the treatment, which led to the death of a teenage beneficiary of the Medicaid program. The qualifications were a requirement material to the decision to make the payment, and the provider was guilty of an “implied false certification.”

So what happens next in Wells Fargo’s case? Assuming Kraus and Bishop prove their allegations, the issue will be whether the Federal Reserve would have viewed the discount window loan application differently if the banks had disclosed that they lacked controls, and were undercapitalized and in generally worse financial condition than appeared from the application. In other words, were those circumstances material to the decision to make the loan? It’s a good bet the Fed would not have made the loan, or at least not at such favorable rates.

The consequences for Wells Fargo are serious. The theory of damages in the case is that Wells Fargo should repay the government the difference between the low rate of interest the acquired banks paid at the Fed’s discount window and the rate they would have paid had the banks not misrepresented their financial condition. On billions of dollars of loans over a number of years, this adds up. As the late Senator Everett Dirksen said, “A billion here, a billion there, and pretty soon you’re talking real money.”


1 United States v. McNinch, 356 U.S. 595, 599 (1958).

2 31 U.S.C. §3729 et seq.

3 Bishop v. Wells Fargo & Company, Wells Fargo Bank, N.A., 823 F.3rd 35 (2nd Cir. 2016).

4 Bishop v. Wells Fargo and Company, 85 U.S.L.W. 3389 (February 21, 2017).

5 579 U.S136 S.Ct. 1989.


​During the first weekend of the Trump Presidency, the President promised one of the ways he would stimulate growth in the economy was to cut federal regulations by 75%, or “maybe more.” A January 20, 2017 Executive Order required that, for every new regulation it proposed, a federal agency needed to identify at least two existing regulations to be repealed. The Code of Federal Regulations, the repository for existing rules, is approaching 200,000 pages. Through May 2016, the Obama administration alone had added 20,642 regulations, some quite complex.

​The new President may be aiming a bit high. Rolling back an existing regulation can be every bit as difficult and time consuming as promulgating the rule in the first place, as we’ll see in the case of the “fiduciary” rule, a regulation the new administration has specifically targeted.

​The more than 50 regulatory agencies of the federal government have the power to promulgate and enforce administrative regulations, which have the force of law. The rules govern businesses, non-profits and individuals across a broad range of conduct. Just how are these regulations promulgated?

​When Congress passes a law, it typically authorizes a federal agency to develop regulations which are necessary to implement the law. In doing so, the agencies are guided by the Administrative Procedure Act. New regulations or amendments to existing regulations are called “proposed rules.” The APA requires that agencies publish proposed rules in the Federal Register at least 30 days before they are effective and provide a means for the public to offer amendments to, to comment on or to object to the regulatory proposal.

​Congress dictates the manner in which the process goes forward. Some regulations require publication and formal public hearings; others only publication and an opportunity for comment. Proposals that require hearings can take months or even years in the case of controversial or complex matters before they become a “final rule,” the regulation which takes effect and is ultimately printed in the Code of Federal Regulations.

​There are two procedures for expedited rulemaking. For regulations on matters which are deemed to be non-controversial, ”direct final” rulemaking involves agency publication of a rule in the Federal Register with the statement that the rule will be effective on a particular date unless adverse comment is received within a period of time, typically 30 days. If there is adverse comment, the “direct final rule” is withdrawn, and the agency may publish a proposed rule. Agencies can dispense with advance publication if there is “good cause” for doing so. This exception applies in the case of “interim final” rulemaking, in which a rule is effective with post-promulgation opportunity for comment, or where more formal procedures are “impractical, unnecessary or contrary to the public interest.” The “good cause” exemption is a very narrow one.

​Once made, regulations can be overturned by the courts or an act of Congress, or pursuant to the Congressional Review Act (“CRA”), under which Congress can disapprove a rule by joint resolution, subject to presidential veto, within 60 legislative days after submission to Congress for “major” rules and within 30 days for “non-major” rules. Until the second week of the Trump Presidency, Congress had only once before, in 2011, successfully utilized the 20-year-old CRA, to overturn a rule requiring that employers take steps to avoid ergonomic injuries, while President Obama had vetoed five other attempts. In just one week, Congress has now used the CRA five times to roll back a regulation, including an SEC rule requiring energy companies to disclose payments made to foreign governments for developmental rights.

​Unless vulnerable under the CRA, the President will likely find that eliminating federal regulations, especially the ones he deems overly burdensome for business, is a complicated and lengthy process. A proposal to repeal a rule is itself a “proposed rule,” and it triggers rulemaking in reverse. Rolling back a regulation requires publication, comment and perhaps hearings. Take the “fiduciary” rule as an example.

​The rule, issued by the Department of Labor under the authority of the Employment Retirement Income Security Act of 1974, requires that those who provide advice to retirement plans, and plan participants and beneficiaries act in the best interests of clients and provide up front disclosure of fees, and bars conflicts of interest. A similar, more broadly applicable, proposal is before the SEC. The rule would virtually preclude brokers and others from recommending certain pricey investment vehicles. It would also impose what critics have said are onerous compliance and recordkeeping requirements.

​The fiduciary rule was promulgated in April 2016. So it is not subject to congressional disapproval under the CRA. Creating the rule took years and was a contentious, complicated affair. Repealing it may be no easier. The fiduciary rule cannot be undone through an abbreviated procedure. Rolling it back would require a new proposal, notice and a potentially lengthy comment and hearing period. In other words, it might take just as long to unmake the rule as it took to make it in the first place. What is more, it is almost certain that a repealer would not be in place by the time the rule is scheduled to take effect, on April 10, 2017.

​There are also new complications. Some of those who initially opposed the rule–namely, the larger brokers and insurance companies–have already made substantial investments in the technology and compliance expertise necessary to implement it. Believing that independent advisors and broker-dealers lack the resources to do the same, the larger firms may well believe that they have a stake in the survival of the rule to preserve their competitive advantage. In fact, that is precisely what happened in the United Kingdom, which adopted a similar rule in 2011. Since then, the number of U.K. financial advisors has decreased by approximately 22.5%.

​The fiduciary rule is not unique in its complexity and in the consequences, intended and unintended, to which it gives rise. Imagine that complexity multiplied many times over and you can see the magnitude of the task of slimming down the Code of Federal Regulations and the bureaucracy it governs.

​There is, however, a tactic on offer to take the sting out of the fiduciary rule or, for that matter, any regulation. Without funding and a regulator willing to regulate, a rule will have no, or limited, effect. If the new administration decides to withhold funding and declines to enforce the regulation, those who are regulated need not worry about federal government interference. The rule could soon be forgotten.

A draft of a White House memorandum of February 3, 2017 contained an order that implementation of the fiduciary rule be delayed for 180 days pending further review. The order was contrary to the existing rule and of dubious legality. Ultimately, the Presidential Memorandum on Fiduciary Duty Rule of the same date called for reexamination of the regulation, but otherwise left it intact.

​While our purpose is not to recommend policy, we do see merit in a suggestion by Cass Sunstein, who served in the Obama White House, in a November 29, 2016 Bloomberg View column. He called the “two-for-one” idea a “gimmick,” and proposed tweaking the mechanism for eliminating regulations focused on the burdens they impose: the administration could waive two-for-one or impose two-for-one on a government-wide basis, with an emphasis in either case on preventing imposition of a costly rule coupled with elimination of two whose total cost is modest.

​Assessing the costs of a roll back of the fiduciary rule is no easy matter. It requires a balance of the burden on the industry against the cost of repeal, borne exclusively by consumers in the form of higher fees. That’s only one reason an attempted repeal might be controversial, and maybe challenging.