Friday, July 18, 2008

Sometimes It Is Just Better to Take the Loss - DOJ Takes A Second Punch

Amir Efrati of the Wall Street Jrl reports on a ruling in the Second Circuit in a post titled, Second Circuit Stings SDNY in “Specialist” Case. The Second Circuit affirmed the acquittal of the trial court, an acquittal that occurred post trial following a jury verdict. Some thoughts on this decision:

What the Second Circuit decision held -

  • The court refuses to find that "interpositioning" per se constitutes securities fraud.  Interpositioning is when a specialist "'prevents the normal agency trade between matching public orders and instead interposes' himself 'between the matching orders in order to generate profits' for the principal account -- in other words, when the specialist acts as an arbitrage by taking a profit on the spread between the bid price and the ask price of customers' orders." (p. 3-4)
  • The court finds that a violation of a "NYSE rule does not establish securities fraud in the civil context... let alone in a criminal prosecution." (p. 18)
  • The court finds insufficient evidence of securities fraud here saying that "the government has attributed to [the accused] nothing that deceived the public or affected the price of any stock: no material misrepresentation, no omission, no breach of a duty to disclose, and no creation of a false appearance of fact by any means." (p. 19)

Commentary -

  • Some DOJ individuals might be thinking about what kind of language is needed for a new statute so that the conduct they wish to criminalize will be covered. 
  • What needs to be said by high-ups at DOJ:  It's a unanimous decision.  How much money should be expended on being told that this isn't securities fraud.  Some things just need to be left to control by regulators.
  • Those with similar cases on appeal are probably celebrating, and those who plead guilty may be calling lawyers to see if anything can be done to change their plea.
  • Don't hold your breath waiting for the US Attorneys Office to issue a press release on this decision as it never seems to happen when they are unsuccessful.
  • There's plenty of criminal activity in society today - especially related to Internet fraud and identity theft.  Maybe this is how DOJ should be spending its time and energy.

(esp) (w/ a hat tip to Bill Olis)

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I'm outraged. Specialists are breaking NYSE rules and making millions doing it. How is that NOT securities fraud?! Do you have any idea how easy it is to make millions when everyone has to play the game by the rules and you don't?!!

Posted by: DAG | Jul 18, 2008 5:22:27 PM

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