New York Law Journal

Court Reverses Conviction of Ex-Trading Specialist
Beth Bar
New York Law Journal

02-22-2007
In a blow to the office of Southern District of New York U.S. Attorney Michael J. Garcia, a federal judge has taken the rare step of reversing a jury verdict convicting a former New York Stock Exchange trading specialist of securities fraud in a scheme known as "interpositioning."

Southern District Judge Denny Chin, in United States v. Finnerty, 05 cr. 393, agreed Wednesday to enter a judgment of acquittal, setting aside the Oct. 26, 2006, verdict.

Chin held that while federal prosecutors proved that defendant David Finnerty engaged in interpositioning, they failed to prove fraudulent or deceptive conduct within the meaning of the securities laws.

"I hold that the government did not ... establish that Finnerty's customers were misled or defrauded or otherwise deceived," he said in a 37-page opinion.

In describing interpositioning, the judge said that instead of matching pending buy and sell orders, the specialists repeatedly trade for their company's proprietary account, making a profit from the slight differences in pricing.

Southern District prosecutors have had a difficult time proving criminal charges against Finnerty and 14 other floor specialist traders whom they accused of using their inside positions to earn an estimated $20 million illegally for themselves and their companies.

Before Wednesday's ruling, the U.S. Attorney's Office for the Southern District had already dropped charges against seven of the defendants. Besides Finnerty, two former traders (Michael Stern and Michael Hayward of Van der Moolen Specialists USA) were convicted, two were acquitted and two pleaded guilty. One defendant remains at large. (NYLJ, Aug. 10, 2006)

"The government [in these cases] provided no real evidence that customers were deceived," said Jacob Zamansky, a plaintiffs attorney at Zamansky & Associates who specializes in securities litigation but did not represent any of the defendants in the interpositioning cases. "This almost looks like a victimless crime."

Finnerty was employed by Fleet Specialist beginning around 1996. From September 2000 until April 2003, he brought together buyers and sellers of General Electric stock, among others.

"Indeed, Finnerty was so successful ... that he would, on occasion, be interviewed by CNBC about the market, and was featured in newspaper articles about the NYSE," Judge Chin said in his decision.

That career came to a screeching halt in 2005, when Finnerty, 40, was indicted on charges that he engaged in a scheme that involved positioning his company between buyers and sellers in order to make money for Fleet Specialist, which in turn increased his bonuses.

The government said Finnerty's actions resulted in his cheating investors of $4.5 million, but attorneys for Finnerty said the government failed to demonstrate this harm.

"They ... provided no evidence that [Finnerty's actions] resulted in the loss of one penny to public customers," Frederick P. Hafetz, a partner at New York's Hafetz & Necheles who represented Finnerty, said during closing arguments in the case in October. (NYLJ, Oct. 26, 2006)

In his decision Wednesday, Judge Chin said prosecutors adequately demonstrated that Finnerty engaged in interpositioning, but failed to prove that customers expected one thing and got something different as a result of his actions.

"Without evidence of what the customers expected, no rational juror could conclude that the ... trades had a tendency to deceive or the power to mislead," Chin said. "A juror would only be able to reach that conclusion by speculating -- impermissibly -- as to what customers expected."

The judge said that if the judgment of acquittal is later vacated or reversed on appeal by the 2nd Circuit U.S. Court of Appeals, a new trial would be granted.

He took prosecutors to task for their repeated reference during the trial to 26,300 instances of interpositioning. He said this number was "unduly prejudicial" and "clearly and significantly overstated."

"I am confident that the Government did not inflate the numbers intentionally, but it appears that the Government failed to account for numerous circumstances when Finnerty was not executing the trades himself -- he was not on the floor or he was at his post or he was negotiating with the crowd or otherwise engaged in non-trading activity," Chin said.

Hafetz said Wednesday that these "inflated numbers" prevented his client from receiving a fair trial.

He added that Chin's decision "is a vindication" of Finnerty.

Finnerty was fired by Fleet Specialist, now Banc of America Specialist, in 2003. The company itself has never admitted any wrongdoing. However, its former president and chief supervisory specialist was fined $125,000 by the stock exchange.
In addition to Hafetz, Finnerty was represented by Tracy E. Sivitz, an associate at the firm.

Assistant U.S. Attorneys Lauren Goldberg and Anirudh Bansal prosecuted the case. A spokesperson for the U.S. Attorney's Office declined to comment.


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