Former JPMorgan traders Gregg Smith, Michael Nowak, Christopher Jordan, and Jeffrey Ruffo are not giving up their fight in a spoofing case brought by the Department of Justice (DOJ). Less than a month after the DOJ filed its opposition against the defendants’ motion to dismiss the indictment, the traders have responded to the DOJ’s arguments.

Earlier this week, the traders filed a joint motion in support of their effort to dismiss the second indictment in this case. The document, submitted at the Illinois Northern District Court and seen by FX News Group, challenges the DOJ’s arguments.

Let’s recall that the Second Superseding Indictment charges the traders with:

• Conspiracy to conduct or participate in an enterprise engaged in a pattern of racketeering activity;
• Conspiracy to commit price manipulation, wire fraud affecting a financial institution, commodities fraud and spoofing;
• Attempted price manipulation;
• Wire fraud affecting a financial institution;
• Commodities fraud;
• Spoofing.

In its Opposition, the DOJ asserted that the defendants’ purported barrier-running was fraudulent because they placed orders that they intended to trade, but with the aim of artificially moving the price of gold. The defendants say that this is a novel theory that was brought up for the first time in the DOJ’s Opposition to the defendants’ motion to dismiss. That is, the defendants say that this theory was not a part of the indictment.

As the government would have it, a futures order that a trader intends to be executed “inject[s] false and misleading information about the genuine supply and demand” if the trader’s buying or selling was not for a “legitimate purpose,” the traders argue. But the Indictment does not make this allegation.

Further, the traders note that even if this theory were alleged in the Indictment, the government cites no authority to support its claim that trading without a “legitimate purpose” can constitute a misrepresentation.

The traders say that the government’s assertion significantly expands the scope of the federal property fraud statutes beyond existing precedent.

Moreover, the government is said to have failed to identify any other statement made false or misleading by Defendants’ purported “illegitimate purpose,” and the Indictment does not allege that a trader’s orders, let alone actual trades, convey anything at all about a trader’s reasons for trading.

According to the traders, the government’s expansive fraud theory threatens to criminalize as fraudulent a wide range of trading practices and other commercial activity, based simply on whether the buyer or seller’s motive is deemed “illegitimate.” Buying and selling occurs for a variety of reasons that are not known to other market participants. To be sure, there is no legal standard that the government can point to that would distinguish a legitimate purpose from an illegitimate one.

Such a “sweeping expansion of federal criminal jurisdiction” must be rejected “in the absence of a clear statement by Congress,” the traders argue.

The traders add that the government’s theory also collapses the distinction between fraud and trading-based market manipulation. Courts have found that price manipulation under the Commodity Exchange Act can be established without regard to whether the conduct at issue involved a scheme to defraud, whereas fraud requires a misrepresentation or material omission.

“Permitting the government to charge wire fraud without any alleged misrepresentation or material omission would make every price manipulation a fraud, a theory for which we know of no legal support,” the defendants conclude.