Second Circuit Stings SDNY in “Specialist” Case

[WSJ_law_blog]

David Finnerty, left, conducts trading in shares of General Electric on the floor of the New York Stock Exchange in this Jan. 17, 2001, file photo. (AP Photo/Richard Drew, File)

This just in: In a setback for the U.S. attorney’s office in Manhattan, a federal appeals court upheld the acquittal of David Finnerty, a former specialist trader at Fleet Specialist Inc. who had been accused of making improper trades for his firm’s account at the New York Stock Exchange. The ruling ends another chapter in the prosecution of 15 “specialists” by the office, which has rendered mixed results for the office. .

Chad Bray, LB correspondent at the Southern District courthouse, reports (link not available) that a 2nd Circuit panel unanimously said Finnerty violated NYSE rules, but prosecutors failed to prove at trial that Finnerty’s conduct was deceptive or that he had misled his customers. (For the 19-page opinion, click here.)

Specialist traders match buyers and sellers at the NYSE (now part of NYSE Euronext) and provide liquidity by buying or selling shares when there is an imbalance on the floor.

The government had argued at trial that Finnerty committed securities fraud by engaging in interpositioning, or improperly stepping between public buy and sell orders and trading for his firm’s account. Prosecutors said the conduct resulted in illegal profits to his dealer account of approximately $4.5 million.

In its decision, the 2nd Circuit said the government’s evidence showed Finnerty knew he had broken the exchange’s rules and tried to cover it up, but that didn’t mean he committed criminal fraud.

“Finnerty may have known that interpositioning was wrong within the context of his employment, and that it put him at risk professionally, but an awareness of peril, a guilty conscience or an impulse to cover one’s tracks does not bespeak criminally fraudulent conduct within the context of the securities laws,” the three-judge panel said. “The government has attributed to Finnerty nothing that deceived the public or affected the price of any stock: no material misrepresentation, no omission, no breach of a duty to disclose . . . . ”

The U.S. Attorney’s office in Manhattan, which declined to comment on today’s ruling, originally brought cases against 15 specialists in 2005. A jury found Finnerty guilty of three counts of securities fraud in October 2006, a verdict that prompted a rare courtroom appearance by U.S. Attorney Michael Garcia, because until then his office’s record in the prosecutions had been shaky.

But a few months after the Finnerty verdict, U.S. District Judge Denny Chin set aside the conviction, saying the government failed to prove that “Finnerty’s customers were misled or defrauded or otherwise deceived.”

Prosecutors eventually dismissed charges against seven of the 15 specialists who were accused of making illegal trades. (Two others were acquitted, two pleaded guilty and two were convicted and are appealing their convictions. Another defendant is at large.)

Representing Finnerty is Frederick P. Hafetz, who told Dow Jones Newswires that Finnerty is still facing a pending administrative action by the Securities and Exchange Commission.