“Spoofing Equals Fraud” – The Seventh Circuit’s Definitive Pronouncement in United States v. Gregg Smith (2025)

Introduction

In United States v. Gregg Smith, Michael Nowak & Christopher Jordan, Nos. 23-2840/46/49, the U.S. Court of Appeals for the Seventh Circuit delivered a far-reaching opinion that cements “spoofing” – the rapid placement and cancellation of orders to steer market prices – as a scheme to defraud actionable under the federal wire-fraud statute (18 U.S.C. § 1343) and the commodities-fraud statute (18 U.S.C. § 1348), in addition to the Dodd-Frank anti-spoofing provision (7 U.S.C. § 6c(a)(5)(C)).

Three former precious-metals traders from JPMorgan and Credit Suisse were convicted in the Northern District of Illinois for spoofing thousands of futures orders. On appeal they launched an array of challenges – constitutional, statutory, evidentiary, and instructional – all of which the Seventh Circuit, in an opinion by Judge Kirsch joined by Judges Easterbrook and Kolar, rejected in full.

At stake was not merely the fate of three defendants, but whether deceptive market-manipulation practices unaccompanied by an express misstatement about price or product characteristics fall within the ambit of federal fraud statutes. The Seventh Circuit’s answer is an emphatic yes.

Summary of the Judgment

• Essential holding: Spoofing constitutes a “scheme to defraud” even though the counter-party receives the very futures contract bargained for; deception aimed at inducing the transaction suffices.
• Constitutional challenge: The anti-spoofing statute is not void for vagueness; the fraud statutes are not vague as applied.
• Intent standard: The government need only prove an intent to cancel at the moment the spoof orders are placed; inserting an “unconditional intent” requirement is unnecessary and incorrect.
• Evidentiary rulings: Admission of lay trader testimony, investigator testimony, and investigative reports was within the trial court’s discretion; exclusion of certain post-Dodd-Frank compliance documents and of a self-serving statement under Rule 106 was proper.
• Jury management: The district judge correctly re-read a Silvern instruction and reminded jurors that arguments are not evidence.
• Disposition: All convictions and the denial of new-trial motions AFFIRMED.

Analysis

1. Precedents Cited and Their Influence

• Kousisis v. United States, 145 S. Ct. 1382 (2025) – Supreme Court decision, issued during briefing, holding that wire fraud covers material deception even when the victim receives contractual performance. The Seventh Circuit treated Kousisis as “foreclosing” defendants’ argument that fraud requires deprivation of “core property,” thus anchoring its holding.
• United States v. Coscia, 866 F.3d 782 (7th Cir. 2017) – the first appellate decision upholding Dodd-Frank’s anti-spoofing law. Smith extends Coscia by confirming spoofing’s status not only under § 6c(a)(5)(C) but also under §§ 1343 and 1348.
• United States v. Pacilio, 85 F.4th 452 (2d Cir. 2023); United States v. Chanu, 40 F.4th 528 (7th Cir. 2022) – companion spoofing cases used to affirm the sufficiency of circumstantial intent evidence and dismiss vagueness claims.
• Earlier “essential-element” cases – United States v. Takhalov (11th Cir. 2016), United States v. Bruchhausen (9th Cir. 1992), etc. – were analyzed and effectively narrowed by the Supreme Court’s fresh teaching in Kousisis.

2. The Court’s Legal Reasoning

a. The “Scheme to Defraud” Question

The core issue was whether spoofing fits within the statutory phrase “scheme or artifice to defraud.” Defendants argued that because market participants obtained the futures contracts they sought—at the traded price—there was no property deprivation, merely a distortion of information. The panel, guided by Kousisis, rejected the “essential-element” path:

“[A] fraud conviction can stand if the defendant used a material misstatement to trick a victim into a contract that requires handing over her money or property.” (Op. at 12–13)

Spoofing manipulates the “fact of supply and demand,” a material input that induces contract formation; thus it is fraud even though the commodity’s intrinsic characteristics remain unchanged.

b. Intent Analysis

Intent was measured at the moment the spoof order is placed. By definition, spoofing relies on a pre-planned cancellation; therefore, any “conditional intent to trade” collapses into proof of intent to cancel. The court dismissed semantic attempts to add an “unconditional intent” gloss, emphasizing precedent that “direct evidence is not required; the scheme itself may prove intent.” (Op. 15 ff.)

c. Vagueness and Constitutionality

Re-affirming Coscia, the panel held that the anti-spoofing language—prohibiting any “transaction or order…that is…of the character of…spoofing”—provides sufficient notice when read with exchange rules and industry understanding. Likewise, applying §§ 1343 and 1348 to spoofing was not unpredictable: traders have long been on notice that deceptive market manipulation is prohibited.

d. Evidentiary & Procedural Rulings

• Lay Trader Testimony: Coworkers who previously pled guilty could describe spoofing, opine from experience, and even use terms like “fraud” in a colloquial sense; such testimony helped the jury “sort through the highly technical trading data.”
• CME Investigator Wika: Proper lay opinion based on personal investigation; any borderline “expert” flavor was harmless given overwhelming evidence.
• Rule 106 & Compliance Policies: Jordan’s self-serving “I didn’t think it was wrong” remark was not required for completeness; post-Dodd-Frank policies risked jury confusion and were excludable under Rule 403.
• Silvern Instruction: Re-reading the pattern charge to a formerly deadlocked jury was squarely within accepted Seventh Circuit practice.

3. Potential Impact

The decision has several consequences:

• Expansion of Fraud Doctrine: By aligning with Kousisis, the Seventh Circuit forecloses arguments that manipulation absent price misstatement falls outside wire/commodities fraud — an approach other circuits are likely to cite.
• Enforcement Leverage: Prosecutors may charge spoofing, layering, and similar tactics as both Dodd-Frank violations and traditional fraud, increasing sentencing exposure and investigative tools (e.g., wire taps for § 1343).
• Compliance Programs: The court’s emphasis on contemporaneous policies and notice pressures firms to maintain clear anti-manipulation guidance; “everyone was doing it” defenses will find little sympathy.
• Algorithmic & High-Frequency Trading (HFT): Although the defendants here used manual entries, the opinion’s reasoning sweeps broadly: any programmed order-type designed to project false demand may trigger fraud liability.
• Litigation Strategy: The Seventh Circuit’s endorsement of circumstantial intent proof (large order size, rapid cancellation, market impact) provides a template for expert testimony and data analytics in future trials.

Complex Concepts Simplified

• Spoofing: Placing large buy/sell orders you never mean to execute to create a false impression of market demand, then quickly canceling them after moving the price to favor your real (smaller) orders on the opposite side.
• Fraud-on-the-Market Theory: Even without direct dealings, deceptive actions that distort market information can defraud every participant who relies on that market’s integrity.
• Rule 106 (Rule of Completeness): When one party introduces part of a statement, the other may demand admission of other parts only if needed to avoid misrepresentation or provide context.
• Silvern Instruction: A Seventh Circuit-approved supplemental charge urging a deadlocked jury to re-examine its views without abandoning sincere convictions.
• Void-for-Vagueness: A constitutional doctrine striking statutes that fail to give ordinary people fair notice of prohibited conduct or invite arbitrary enforcement. The court found the anti-spoofing rule sufficiently clear.

Conclusion

United States v. Gregg Smith is now the Seventh Circuit’s lodestar for spoofing prosecutions. By explicitly holding that market manipulation via spoof orders is a scheme to defraud—even where counterparties receive what they bargained for—the court closes off a major defense line, harmonizes with the Supreme Court’s latest fraud jurisprudence, and equips regulators and prosecutors with a robust doctrinal framework. The opinion also showcases judicial tolerance for sophisticated circumstantial proof and underscores that the federal bench will not hesitate to treat non-traditional, data-driven deception as classic fraud. For traders, compliance officers, and litigators alike, the message is unmistakable: spoof at your peril.