Thursday, February 22, 2007
U.S. District Judge Denny Chin reversed the securities fraud convictions of New York Stock Exchange floor broker David Finnerty, another in a series of setbacks in high-profile securities fraud prosecutions that began with a big splash and seems to be ending with a whimper. Fifteen brokers were indicted on charges alleging that they stepped in front of their customers to intercept trades at more favorable prices, leaving the clients putting in orders to pay a higher price or receive a lower one in the transaction. Called "interpositioning," it is basically front-running in which the floor broker, who is responsible for ensuring that the market trades smoothly, uses his superior position to recognize trends and trade for his firm's own account before executing customer orders -- in elementary school,, it was called "front-cuts." Judge Chin granted Finnerty's Rule 29 motion for a judgment of acquittal, finding that the government had not proven the defendant's conduct defrauded customers, the key to a securities fraud conviction (opinion below). Judge Chin held:
Finnerty is not arguing that evidence of customer expectations is an element of the crime that the Government must establish for a conviction under 10b-5. Rather, Finnerty is arguing that, under the facts of this case, the Government could not prove that interpositioning was deceptive without showing what the investing public expected. I agree . . . the Government was required to prove that customers expected one thing and got something different. Without evidence of what the customers expected, no rational juror could conclude that the interpositioning trades had a tendency to deceive or the power to mislead. A juror would only be able to reach that conclusion by speculating . . . .
Finding no evidence that the customers were misled, the conviction could not stand. The opinion also questions whether Finnerty even owed a fiduciary duty to customers who had no clue about the floor broker's role in a transaction, which is usually a linchpin in a fraud prosecution based on an omission rather than a misstatment.
The government earlier dismissed a number of cases against other floor brokers, and some were acquitted after trial. Two broker were convicted of securities fraud in July 2006 after trial before a different judge, and two others entered guilty pleas. Challenges to the two convictions likely will be bolstered by Judge Chin's decision. (ph)