Smith set up his third empire much the same way as he had in Denver and Creede. He put the town's deputy U.S. marshal on his payroll and began collecting allies for a takeover. Smith opened a fake telegraph office in which the wires went only as far as the wall. Not only did the telegraph office obtain fees for "sending" messages, but also cash-laden victims soon found themselves losing even more money in poker games with newfound "friends." Telegraph lines did not reach or leave Skagway until 1901. Smith opened a saloon named Jeff. Smith's Parlor in March 1898 as an office from which to run his operations. Although Skagway already had a municipal building, Smith's saloon became known as "the real city hall."
During the Spanish–American War in 1898, Smith formed his own volunteer army with the approval of the United States Department of War, known as the "Skaguay Military Company," with himself as its captain. Smith wrote to President William McKinley and gained official recognition for his company, which he used to strengthen his control of the town.
On July 4, 1898, Smith rode as marshal of the Fourth Division of the parade leading his army on his gray horse. On the grandstand, he sat beside the territorial governor and other officials.
On July 7, 1898, John Douglas Stewart, a returning Klondike miner, came to Skagway with a sack of gold valued at $2,700 ($82,620 in 2017 dollars). Three gang members convinced the miner to participate in a game of three-card monte. When Stewart balked at having to pay his losses, the three men grabbed the sack and ran. The "Committee of 101" demanded that Smith return the gold, but he refused, claiming that Stewart had lost it "fairly."