Spoofing
United States of America v. Smith
Date: Aug. 20, 2025
Issue: Whether the Northern District of Illinois erred by denying motions for acquittal and new trials for three traders convicted of spoofing.
Case Summary: In a unanimous decision, a Seventh Circuit panel affirmed the spoofing convictions of three former JPMorgan traders, ruling that spoofing constitutes a scheme to defraud because it deceives the market into believing orders reflect genuine supply and demand when they do not.
Spoofing is a deceptive tactic in which a person deliberately hides their true identity to pose as a trusted source and extract sensitive data or infiltrate secure systems. The trader first places a genuine order with the intention of executing it. Then, the trader submits a spoof order on the opposite side of the market to create an illusion of activity. This prompts a market reaction, allowing the trader to execute a genuine order at the desired price. Finally, the trader cancels the spoof order before it is filled.
In 2022, traders Michael Novak and Gregg Smith were convicted of wire fraud, attempted price manipulation, commodities fraud and spoofing. In a separate trial, trader Christopher Jordan was convicted of wire fraud affecting a financial institution. All three traders once traded precious metals futures contracts on commodities exchanges operated by the Chicago Mercantile Exchange Group. Each of the traders was ultimately convicted of spoofing for “gaming the system” and manipulating the prices of the precious metals futures they traded. The Northern District of Illinois denied the traders’ motion for acquittal and a new trial. The traders collectively appealed the denial and also challenged several of the district court’s rulings at trial.
On appeal, the traders argued that spoofing is not fraud because the deceptive conduct at issue does not concern an essential element of the bargain. Because spoofing misrepresents market supply and demand, rather than the price or another characteristic of the asset itself, the traders contended the other parties received exactly what they paid for.
The Seventh Circuit affirmed all the convictions. The panel rejected the traders’ essential-element-of-the-bargain argument, relying on the Supreme Court’s decision in Kousisis v. United States. In Kousisis, the Court clarified that a defendant may face federal fraud liability for inducing a victim to transact under materially false pretenses, even if they did not intend to cause economic loss. The panel 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.”
In addition, Smith and Novak argued that, even if spoofing constituted wire and commodities fraud, the evidence did not support their convictions because they never engaged in the practice. The panel reviewed the evidence and determined that a reasonable jury could find that Smith and Nowak placed spoof orders with the intention of canceling them. According to the panel, the government introduced extensive trading data that illustrated the scheme, and it presented testimony from cooperating witnesses, financial experts, and investigators. The panel explained that this testimony, combined with contemporaneous chat messages showing Smith and Nowak placing and then canceling orders opposite their genuine trades, provided ample support for the jury’s finding of guilt.
The panel also rejected Smith and Nowak’s argument that the district court abused its discretion by admitting certain evidence and giving the jury erroneous, coercive instructions. The panel concluded that none of the court’s evidentiary rulings constituted an abuse of discretion under Federal Rule of Evidence 701. It also determined the jury received proper instructions before convicting Smith and Nowak.
The panel also upheld Jordan’s conviction, who admitted to spoofing but argued he lacked the necessary criminal intent. Jordan claimed the district court erred by excluding: his statement that he “did not think what he was doing was wrong,” post-2010 compliance documents explicitly banning spoofing, and a requested good-faith jury instruction. The panel rejected these arguments, determining his exculpatory statement was irrelevant, the excluded documents posed a risk of juror confusion, and a good-faith instruction was unnecessary in wire fraud cases.
Bottom Line: The Seventh Circuit ruled spoofing is fraud and market manipulation. The Seventh Circuit declined, however, to distinguish spoofing from wire fraud and commodities fraud.
Documents: Opinion
