The White Collar Appeal: Seventh Circuit Holds Spoofing is Fraud

• “Spoofing,” or the practice of submitting buy or sell orders to trading platforms with the intent to withdraw them prior to execution, is considered fraud under the Seventh Circuit’s decision in United States v. Smith, issued Wednesday, August 20, 2025.
• In Smith, three former JPMorgan commodities traders argued that their spoof orders did not misrepresent an “essential element of the bargain” and therefore did not qualify as a scheme to defraud.  The Seventh Circuit rejected that argument.
• The decision also held that a district court’s failure to give a good-faith instruction in a fraud case is effectively unreviewable on appeal, leaving fraud defendants at the mercy of the district court.

Background

Spoofing.  Spoofing is a practice in which a securities or commodities trader submits a buy or sell order that she intends to withdraw before another trader can accept the offer and execute the transaction.  The purpose of submitting such a false offer is to create the appearance of market sentiment that benefits a different, genuine, transaction the trader intends to execute. The classic process of spoofing involves four steps.  First, the spoofer places an order that she genuinely intends to trade.  Second, the spoofer places a spoof order on the other side of the market that she does not intend to trade.  Third, the market reacts to the illusion of market activity generated by the spoof order, allowing the trader to execute the genuine order at her desired price.  Fourth, the trader cancels the spoof order before it can be filled.  So if a spoofer wanted to buy a stock that currently is trading at $12 but did not want to pay more than $11.90, she would (1) place a buy order for $11.90; (2) place a very large sell order at a higher price, hoping that market participants will believe that there is excess supply in the market; (3) wait for the market's perception regarding supply to cause the price to fall to $11.90 and execute the genuine buy order; and (4) cancel the sell order before anyone in the market executes that order.

United States v. Smith.  Smith involved three former JPMorgan precious metals traders whose trading activity was consistent with the four-part process outlined above.  The government also elicited testimony from the defendants’ JPMorgan coworkers that the defendants had taught them how to spoof; that the defendants became angry when market participants executed their spoof orders before they could cancel them; and that, after a meeting where JPMorgan compliance officials warned traders to stop spoofing because regulators were investigating, one defendant exclaimed “[t]here goes the business”; and one defendant coached a witness prior to a compliance review by saying, “Remember, every order we placed, we intended to trade.”  One defendant—who was tried separately from the other two—did not deny that he engaged in the four-part spoofing activity described above.  His defense was instead that he didn’t realize there was anything wrong with spoofing and thus could not be guilty of fraud.

All three defendants were convicted of wire fraud, commodities fraud, and the anti-spoofing provision of the Dodd-Frank Act.  On appeal, they argued that spoofing does not constitute fraud because the deceptive conduct at issue does not concern an essential element of the bargain.  Instead, because spoofing misrepresents market supply and demand, rather than the price or another characteristic of the asset itself, the defendants contended that the other parties to the transaction received exactly what they paid for.  The defendants argued that spoofing is like making a misrepresentation about one’s “negotiating position” in an arm’s-length transaction, which is not fraud.

Additionally, the defendant who was tried alone and argued that he did not realize spoofing was wrongful challenged the district court’s failure to deliver a jury instruction that, if the jury found he acted in good faith, they should find that he lacked the intent to defraud required under the fraud statutes.

Holdings

The Seventh Circuit unanimously affirmed all convictions.  The court decisively rejected defendants’ essential-element-of-the-bargain argument, relying on the Supreme Court’s recent decision in Kousisis v. United States, 145 S. Ct. 1382 (2025).  Under Kousisis, the wire fraud statute “is agnostic about economic loss,” and a fraud conviction can stand so long as the defendant used “a material misstatement to trick a victim into a contract that requires handing over her money or property.”  As a result, the Seventh Circuit held that Kousisis forecloses the essential-element-of-the-bargain argument and thus that “spoofing constitutes a scheme to defraud within the meaning of the wire and commodities fraud statutes.”  Notably, however, the court explained that spoofing still would constitute fraud regardless of Kousisis.  Specifically, spoofing advances a misrepresentation—“an intent to trade” that is contrary to the spoofer’s “private intent to cancel”—that is analogous to theories of securities fraud and fraud-on-the-market, which predicate liability on misrepresentations that undermine the integrity of the marketplace.

The court also rejected the challenge to the district court’s failure to provide a good-faith instruction.  Relying on prior precedent, the court held that a good faith instruction is unnecessary in wire fraud cases because a lack of good faith is a part of the charge and that, although district courts are free to provide such an instruction if they wish, “defendants … cannot demonstrate that the failure to include the good faith instruction denied them a fair trial.”  (Quotation edited.)

Key Takeaways

The Smith Court’s holding may be oversimplistic.  The Seventh Circuit declined to distinguish spoofing from wire fraud and commodities fraud, treating spoof orders as fraud on the market because they are placed with “the private intent to cancel.”  But had a market participant executed a spoof order, the defendants would been obligated to fulfill it, which undermines the notion that a spoof order even qualifies as a “false statement.”  Moreover, the counterparties who transacted with the defendants received the assets they bargained for, and longstanding precedent recognizes that otherwise lawful trading conduct is not fraud even if undertaken for some privately held nefarious purpose.  See, e.g., GFL Advantage Fund Ltd. v. Colkitt, 272 F.3d 189, 207 (3d Cir. 2001) (short sales of stock are not made unlawful by an alleged impermissible purpose to manipulate the stock price, even if sales may have contributed to a decline in the stock price).  Smith’s failure to appreciate the implications of these dynamics of the trading market undermine the persuasive power of the decision.

Defendants should focus on advancing right-to-control theories.  The Smith decision narrows potential defenses in spoofing cases, as the court flatly rejected the essential-element-of-the-bargain argument as a challenge to fraudulent inducement theories.  Defense strategies should instead seek to attack spoofing charges under Ciminelli v. United States (2023), arguing that spoofing deprives the victim only of potentially valuable economic information—that is, information about supply and demand—necessary to make discretionary economic decisions.  As our previous post on a series of recent Second Circuit decisions noted, courts continue to grapple with the outer bounds of Ciminelli, leaving room for creative defense arguments.

The district court’s choice on a good-faith instruction is final in the Seventh Circuit. The Seventh Circuit effectively made good-faith jury instructions unreviewable in wire fraud cases, calling the instruction permissible but unnecessary.  Defendants thus should emphasize evidence of good faith as much as possible, and make it a central component of their defense, so that they can persuade the district judge that a standalone good-faith instruction is justified in their particular case.  Alternatively, defense counsel should be prepared to highlight the portion of the general fraud instruction that alludes to good faith.