What is Spoofing?

“Spoofing” is an illegal, deceptive trading practice that has been a major enforcement focus of the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the Commodities Futures Trading Commission (CFTC) and, to a lesser extent, the Department of Justice (DOJ) in recent years.  In simple terms, spoofing occurs when a trader enters orders to buy or sell securities with no genuine intent to execute them but, rather, places them to create a false impression of market demand or supply.   Once the market reacts to these artificial signals, the spoofer cancels the orders and takes advantage of the price movement they created.  In essence, spoofing is a form of stock manipulation.

For example, a trader places a large order, or typically many orders, to sell shares of a company, making it appear that selling pressure is increasing.  Other market participants react by lowering their bids.  At that point, the spoofer cancels the sell order(s) and buys the shares at the artificially reduced price.   

Because spoofing undermines the fairness, transparency and integrity of U.S. financial markets, it has become a top enforcement priority for securities regulators.  Traders accused of spoofing may face either regulatory, civil and/or criminal investigations, enforcement actions, prosecutions, significant monetary penalties, and even prison time in DOJ cases.  If you are under SEC or DOJ investigation for spoofing, it is critical to understand the potential consequences, the law, potential defenses, and the critical importance of retaining an experienced and seasoned SEC defense attorney to protect your rights, skillfully navigate you through the process and seek to avoid charges being filed.

The Legal Framework Governing Spoofing

Spoofing has been explicitly made illegal under several laws and regulations, including:

• Securities Exchange Act of 1934: Grants the SEC authority to pursue spoofing cases in the equities markets as a form of market manipulation or fraudulent trading.
• FINRA Rules: Rule 2020, which proscribes use of manipulative, deceptive or other fraudulent devices, and Rule 5210, which prohibits the publication of transactions and quotations.
• The Dodd-Frank Act (2010): Amended the Commodity Exchange Act to prohibit spoofing in futures and commodities markets, defining it as “bidding or offering with the intent to cancel the bid or offer before execution.”

Spoofing charges are brought under that anti-fraud provisions of the federal securities laws prohibiting manipulative or deceptive devices and schemes to defraud, including Sections 9 and 10(b) of the Securities Exchange Act.  The SEC and CFTC can pursue civil enforcement actions seeking disgorgement of profits, monetary penalties, injunctions, and industry bars.  Meanwhile, FINRA can bring regulatory cases, and the DOJ may bring criminal charges, sometimes in conjunction with the SEC.

Recent Spoofing Cases

The SEC and DOJ have targeted and aggressively pursued spoofing cases in recent years. Several high-profile examples include:

• United States v. Coscia (2015): The first federal criminal prosecution for spoofing under the Dodd-Frank Act.  The trader was convicted and sentenced to prison for manipulating futures markets with rapid-fire, cancelable orders.
• SEC v. Lek Securities Corp. (2017): The SEC charged a brokerage firm and traders with using layering, a form of spoofing, to manipulate U.S. equities markets.
• United States v. Vorley and Chanu (2020): Two former Deutsche Bank traders were convicted of wire fraud for spoofing in the precious metals futures markets.

These cases demonstrate the government’s commitment and willingness to bring both regulatory, civil and criminal enforcement actions, quite often working in parallel.  They also underscore the potentially life-changing stakes for individuals being investigated for, or accused of, spoofing.  Penalties can include large fines, disgorgement of profits, trading bans, loss of securities licenses and/or incarceration, along with irreparable reputational damage.

What Are the Legal Elements of Spoofing?

To establish liability for spoofing, the regulators typically must prove:

1. Placement of Orders: The accused entered bids or offers in a security or commodity.
2. Intent to Cancel: At the time of placing the orders, the accused had no genuine intent to execute the orders and subsequently cancelled them in an effort to narrow the bid-ask spread or price.
3. Market Impact: The spoofing orders created a false impression of market demand or supply.
4. Profit or Loss Avoidance: The accused benefited financially or avoided losses because of the artificial market movements.

Intent is often the central battleground in spoofing cases.  Regulators rely heavily on trading data, order patterns, internal communications, and witness testimony to attempt to prove that the trader never intended to execute the orders, but rather entered them for a manipulative purpose, (and not for a bona fide reason).

What Are The Legal Defenses to a Spoofing Charge?

Allegations of spoofing are highly fact-intensive, and defenses must be carefully tailored to the specifics of each case.  Common defenses to spoofing include:

• Lack of Intent: Traders can argue that they intended to execute their orders but canceled them due to changing market conditions.

• Good Faith: Trader can argue that he did not realize his actions were wrongful or illegal under the law; however, this is a particularly hard defense to effectively advance, especially if the trader was previously placed on notice by his brokerage firm about the suspicious or illegal nature of the trading.

• Legitimate Trading Strategy: Some trading strategies involve placing and canceling orders as part of liquidity provision or risk management, not illegal stock manipulation.
• Insufficient Government Evidence: Regulators often are left to prove intent based solely, or predominantly, on circumstantial trading patterns, particularly where there is little to no paper trail.  Defense counsel may challenge the adequacy, sufficiency and reliability of the government’s evidence, as well as the underlying theory of prosecution.

Because spoofing cases turn on nuanced interpretations of trading activity and intent, mounting a strong spoofing trading defense requires counsel with deep knowledge of securities laws, regulatory investigations, and market trading.

Why You Need an Experienced SEC Spoofing Defense Attorney

The SEC devotes significant government resources to investigating and prosecuting spoofing cases, often coordinating with FINRA, the CFTC and DOJ.  The complexity of these investigations, and the high-stakes consequences flowing from them, make defending spoofing especially challenging.

This is where the experience and knowledge of David R. Chase, Esq. becomes invaluable.

David Chase is a nationally recognized SEC defense attorney with decades of experience in defending SEC, FINRA and DOJ white-collar investigations around the nation.  Critically, he is a former SEC prosecutor, having served in the SEC’s Enforcement Division as Senior Counsel where he investigated and prosecuted market manipulation cases.  He thus knows how the SEC thinks:  how it investigates, prosecutes and settles its cases.  This insider perspective gives him a unique advantage in defending his clients by allowing him to anticipate the SEC’s next move and by formulating defense strategies designed to avoid charges.

David Chase founded David R. Chase, P.A., a boutique law firm dedicated to defending individuals in SEC investigations, enforcement actions, and related criminal securities cases.  For more than two decades, he has zealously represented clients nationwide, protecting their reputations, livelihoods, and freedom against the government’s considerable resources. 

David Chase’s Approach to Spoofing Cases

When defending clients accused of spoofing, David Chase provides:

• A Comprehensive Investigation: Thorough review of trading data, communications, and relevant facts. 
• Strategic Defense: Development of legal and factual arguments to effectively challenging the SEC’s evidence and theory of prosecution.
• Negotiation Skills: Leveraging his SEC background to negotiate favorable settlements when appropriate, including reducing or avoiding penalties.
• Client-Centric Representation: Understanding the personal and professional stakes and objectives of each client and providing zealous and strategic advocacy every step of the process.

Contact David R. Chase

If you are under SEC investigation for spoofing or other forms of market manipulation, your choice of attorney can make the difference between walking away unscathed or facing charges.  With the SEC, FINRA, CFTC and DOJ aggressively pursuing spoofing cases, you need a seasoned, fierce advocate by your side.

As a former SEC prosecutor and a dedicated SEC defense attorney, David Chase has the experience, insight, and knowledge to protect your interests against the full weight of federal enforcement.

Do not go at it alone and wait until it’s too late.  Early intervention by experienced counsel can often influence the direction of an investigation and may even prevent charges from being filed.

Contact David R. Chase, P.A., today at 800-760-0912 if you are in need of a spoofing defense attorney to schedule a free and confidential consultation.