"Spoofing" as Fraud: A Novel and Untested Theory of Prosecution

Notwithstanding this confusion, the Department of Justice (DOJ) has signaled its intent to pursue spoofing prosecutions aggressively. The lead prosecutor in the spoofing case against New Jersey-based algorithmic trader Michael Coscia described that prosecution as "just the tip of the iceberg." Greg Trotter, "Trader Michael Coscia 1st in nation to be sentenced under 'anti-spoofing' law," Chi. Tribune (July 13, 2016). This ominous proclamation was realized in January 2018, when DOJ announced a "spoofing takedown" bringing a litany of criminal charges, including commodities fraud and wire fraud, against eight individuals alleged to have engaged in spoofing-related activity. See, Press Release, DOJ, "Acting Assistant Attorney General John P. Cronan Announces Futures Markets Spoofing Takedown" (Jan. 29, 2018).

In the months since we published our last article in June 2018, however, several of the defendants in these recent spoofing prosecutions have pushed back, raising arguments that call into question whether the government may properly target spoofing under the commodities-fraud and wire-fraud statutes. In particular, these defendants have argued, among other things, that the government cannot charge spoofing as fraud because spoofing does not involve the making of a false statement — a necessary element of a fraud charge. Rather, the defendants assert that when a trader enters an executable order on an exchange, the only information conveyed to the market is completely accurate, i.e., that the trader placing the order will transact at a certain price and quantity for so long as the order is not cancelled. See generally, United States v. Flotron, No. 17-cr-220 (D. Conn.); United States v. Bases, No. 18-cr-48 (N.D. Ill.); United States v. Vorley, No. 18-cr-35 (N.D. Ill.).