Expert testimony is sure to play a key role in the first criminal trial based on the “anti-spoofing” legislation that was enacted as part of the Dodd-Frank Act in 2010. The trial involves allegations that the defendant, Michael Coscia, manipulated the commodities market by placing orders that he never intended to fulfill.

The Practice of Spoofing

Spoofing is a way of manipulating a trading market. The manipulator “spoofs” by placing an order that is not “bona fide” with the intent to affect the price of a stock, commodity, or currency. When the price changes in response to the “spoof” order, the manipulator cancels the order and places another order to take advantage of the new price. For example, a buy order will be followed by a sell order, which may be followed by alternating buy and sell orders as the price rises and falls.

Spoofing artificially alters market prices. In Michael Coscia’s case, Panther Energy Trading placed small orders to sell contracts in futures markets (including soybeans, natural gas, and copper). It then placed large orders to buy similar contacts at higher prices. The buy orders gave the impression that demand for the commodity was increasing, signaling rising prices and inducing buyers to purchase the contracts that Panther had offered for sale. Panther would then cancel its buy orders and repeat the sequence in reverse by placing a small buy order for the same commodity, followed by large sell orders that it intended to cancel.

The Commodities Future Trading Commission (CFTC) accused Panther of manipulating the market. Panther agreed to pay an administrative penalty of $2.8 million to settle administrative enforcement proceedings.

In addition to the CFTC, the Securities Exchange Commission and other regulatory agencies have pursued civil or administrative remedies, including trading bans, license revocations, and the assessment of financial penalties, against firms that engaged in the practice of spoofing. Day traders have been prime targets of enforcement actions.

Spoofing usually relies upon computer algorithms that place and cancel bids in milliseconds. High-speed, high-frequency trading has come to dominate markets, enhancing the possibility of market manipulation. Its proponents, however, see high-speed computerized trading as a legitimate investment tool.

Spoofing Charges Against Michael Coscia

Federal prosecutors filed criminal charges for violating anti-spoofing laws against Michael Coscia for Panther’s trading activities. The federal indictment alleges that Coscia used his high-speed trading scheme to make $1.6 million in just three months.

Making money is not illegal. Making money by spoofing, on the other hand, is a crime. Coscia’s jury will be the first to consider criminal charges for violations of the anti-spoofing law. Whether Coscia manipulated the market or pursued a legitimate investment strategy is the question the jury will be asked to resolve.

Expert Testimony at Coscia’s Trial

Expert testimony may play a vital role for both sides in Coscia’s trial. Since placing and cancelling orders is not itself illegal, the government’s proof hinges on convincing the jury that Coscia intended to cancel the orders in order to manipulate the market. Coscia claims that he merely engaged in common trading practices. He will likely rely on financial experts to explain to the jury the frequency with which buy and sell orders are cancelled.

Coscia also contends that he abided by the rules of the exchanges in which he placed the orders and blames regulators for failing to provide clear guidance to investors. To establish that he had no intent to violate the law, Coscia plans to call an expert to testify about the industry’s understanding of anti-spoofing legislation in 2011, when his trades took place. Whether the judge will permit the expert to provide the detailed testimony that Coscia seeks is not yet clear.

Prosecutors will also need to rely on experts to educate jurors about how trades are made in the commodities market and about the programming of the software that Coscia relied upon to make those trades. Another trader, Navinder Singh Sarao, has been charged with using market manipulation tactics that were responsible for the “flash crash” of 2010. Prosecutors are relying on the expert opinions of Terrence Hendershott, a professor at the University of California -Berkeley, to make their case against Sarao, who is confined in a London prison as he resists extradition to Chicago.

A federal judge recently dismissed a claim that Shawn Carter (better known to music fans as Jay Z) and Timothy Mosley (a music producer known as Timbaland) infringed a copyright by misappropriating “several notes of flute music” when they created the 1999 hit Big Pimpin’. Jay Z later spent $1 million to shoot a popular music video that contributed to the song’s commercial success.

The lawsuit was based on the claim that the flute notes infringe the copyright on Baligh Hamdi’s1957 song Khosara Khosara. The Egyptian composer’s nephew brought the infringement suit as the heir to Hamdi’s estate. Expert witnesses for both sides testified in an effort to persuade the jury that the sampling did not infringe a copyright.

Copyright Infringement Allegations

Jay Z acknowledges he was inspired by the beat of Khosara Khosara when music producer Timbaland played the flute notes for him. Within hours, Jay Z crafted a song that media accounts describe as a “raunchy ode to a promiscuous lifestyle.” The song “samples” the flute notes in Khosara Khosara.

Rap and hip-hop artists commonly “sample” music by incorporating a small piece of another song into music that they originate. Artists who sample typically start with a digital copy of notes in the song they are sampling. They might or might not alter the sample (by changing its tempo, for example) when adding it to their original creation.

When permission is given to sample, no copyright infringement occurs. Whether sampling without permission violates copyright law is not always clear, and the legal test may depend on the federal circuit in which the infringement lawsuit is commenced. The test often (but not always) asks whether the sample is too small to be important to the overall success of the new recording and whether the sample is significant to the listener’s appreciation of the new song.

While some artists view sampling as a tribute to the sampled work, others regard sampling as stealing. In fact, one of the first major cases to consider whether sampling constitutes copyright infringement begins with the words “Thou shalt not steal.” A key issue in the Big Pimpin’ trial was whether Jay Z and Timbaland stole the notes from Hamdi’s song or used them with permission.

Expert Testimony in the Big Pimpin’ Trial

Expert witnesses testified for both sides in the trial. A musicologist testified that four notes from Khosara Khosara are repeated throughout Big Pimpin’.

Scott Marcus, testifying as an expert for Hamdi’s nephew, said the notes were a significant part of Jay Z’s song. The defense countered that assertion with the expert testimony of musicologist Lawrence Ferrara, who described the notes as “trite, minimal,” and “fragmentary” compared to the song as a whole. He also testified that the sampled notes were “essential building blocks” of music and are not subject to copyright.

Timbaland testified that he created most of the beats for Big Pimpin’ before he added the notes from Khosara Khosara. He denied that the Khosara Khosara notes were a key to the song’s success.

Experts on Egyptian law also testified during the trial. In the end, none of the expert testimony carried the day, as the case was decided on a legal issue.

Case Dismissed

How the jury would have reconciled the conflicting expert opinions will never be known. When the trial ended, the judge decided that the evidence did not create a dispute that the jury needed to resolve.

Timbaland testified without contradiction that he paid $100,000 to EMI Arabia to acquire the right to sample Khosara Khosara. Timbaland made that payment after EMI Arabia asserted ownership of the song and complained that it was sampled without permission. Timbaland also testified that he believed he had purchased a valid license to use the flute notes when he settled EMI’s claim.

Hamdi’s nephew argued that the payment was irrelevant because Timbaland and Jay Z failed to obtain the family’s permission to combine the flute notes with the lyrics and melody in Jay Z’s song. The nephew also complained that Jay Z’s song was vulgar, but the song was never played in its entirety during the trial, so jurors were never exposed to lyrics they might have regarded as offensive.

Hamdi’s nephew contended that Egyptian law gave him a “moral right” to contest the derivative use of Hadmi’s song even if the nephew no longer owned rights to the song. After listening to the testimony of the Egyptian law experts, the judge ruled that Egyptian law did not apply and that Hamdi’s nephew lacked standing to sue since rights to the song were owned by EMI Arabia, not by the nephew. The judge therefore dismissed the lawsuit without sending it to the jury, leaving unresolved the issues about which the musicology experts testified.

Michael Blagg was sentenced to life in prison after being found guilty in 2004 of murdering his wife as she slept. The death occurred in Grand Junction, Colorado. Last year, Blagg was granted a new trial after it was discovered that one of his jurors lied on a juror questionnaire when she claimed never to have been the victim of domestic abuse. The juror later appeared at a city council meeting as an advocate for battered women, where she told the council she had been an abuse victim for ten years.

At a hearing on Blagg’s motion for a new trial, the juror testified that she told the truth on her jury form but lied to the city council in order to make a point. That testimony was undermined by evidence that the juror stated during two divorce proceedings and in a restraining order hearing that she had been abused by her ex-husbands.

Unconvinced that the juror had never been an abuse victim, the court expressed concern that she may have made a decision to conceal her own experience with domestic violence in order to serve on Blagg’s jury. If the juror wanted to sit in judgment of Blagg because she had an agenda, she may have tainted other jurors. The potential violation of Blagg’s right to an impartial jury could only be remedied by a new trial. Several months after the judge granted Blagg a new trial, the juror was convicted of contempt of court for willfully lying on her juror questionnaire.

Blagg’s new trial is scheduled to take place next year. Before it starts, however, the court must decide whether an expert witness who testified in the first trial will be allowed to repeat his testimony.

Trial Evidence

Blagg’s trial lasted for 23 days. Much of the evidence focused on marital discord between Blagg and his wife. No eyewitness saw the murder. No physical evidence linked Blagg to the crime. Blagg’s daughter disappeared the night of his wife’s murder, although Blagg has not been charged with any crime concerning his missing daughter.

Physical evidence suggested that Blagg’s wife was shot in the face while she was in bed. Her body was discovered in a landfill. Prosecutors theorize that the body had been placed in a dumpster at Blagg’s place of business, although they have no witnesses to support that theory.

Controversial Expert Testimony

During the original trial, retired FBI crime scene investigator Ronald Walker testified as a crime scene expert. He told the jury that the murder appeared to be a “staged domestic homicide” and that the murderer had “a high comfort level” that “comes from having intimate familiarity with that house.”

The defense is objecting to the introduction of that testimony in the new trial on the ground that it is based on speculation rather than expertise. While the Colorado Court of Appeals found no error in the admission of that testimony during the first trial, that ruling merely acknowledged that the trial court did not abuse its discretion in permitting it. By the same reasoning, the court has discretion to bar the testimony in the new trial.

The defense is relying on a Colorado Supreme Court opinion that disapproved of “profile” evidence. In that case, the Supreme Court held that an expert could testify that a killing appeared to be a “sexual homicide” but could not testify that the defendant fit the profile of persons who commit sexual homicides.

Blagg’s lawyers are arguing that Walker is pointing a finger at Blagg by testifying that the crime was committed by someone “intimately familiar” with the house, a description that identifies Blagg and no other person. In that regard, they argue that Walker has created a profile and has improperly placed Blagg within the profile.

Crime Scene Expertise

The real question may be whether a crime scene expert is qualified to give testimony that seems more suited to a psychologist. Crime scene experts usually testify about how crimes occurred based on their reconstruction of the crime scene.

Testifying about how a crime probably occurred based on physical evidence is different from testifying about the mental status (in this case, “comfort”) of the person who committed the crime. Yet judges have sometimes permitted crime scene experts to delve into the minds of criminals and their victims. In the recent “American Sniper” trial involving the death of former Navy SEAL Chris Kyle, a crime scene expert testified that Kyle would have protected himself if he had seen the attack coming. Unlike Walker’s testimony, however, that opinion was at least arguably grounded in physical evidence recovered from the crime scene.