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Two Former Traders Argue That Alleged Spoofing Scheme Did Not Constitute Wire Fraud

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Commentary by Bob Zwirb

Two former commodities traders moved to dismiss a wire fraud indictment, arguing that the government cannot prosecute spoofing under the wire fraud statute.

In the U.S. District Court for the Northern District of Illinois Eastern Division, the two former traders, who traded precious metal futures, were indicted for wire fraud, based on an alleged spoofing scheme between December 2009 and November 2011. Their former employer approved those trades, leaving the government to pursue the remaining wire fraud charges against the former traders. The former traders filed a Motion to Dismiss, arguing that (i) they did not make false or misleading statements and (ii) spoofing does not involve false or misleading statements.

Commentary

One of the problems with attempting to "shoehorn" spoofing into the wire fraud statute, as defendants argue, is that the elements of the wire fraud statute are far more exacting than the elements for commodities fraud. Whether that legal argument is valid and sufficient is a legal question for the court to decide. What prosecutors should think about, however, is whether it is good policy to apply such criminal statutes to trading activities that may serve a useful purpose, but nevertheless resemble spoofing, such as entering and quickly cancelling iceberg orders to get a sense of market supply and demand. Such activity may be over deterred if expansive notions of criminal fraud (e.g., that such orders constitute false and misleading representations) and criminal sanctions are applied.

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