On February 21, 2007, a US federal court vacated a jury verdict convicting a NYSE specialist of securities fraud for engaging in a practice known as interpositioning. In United States v. Finnerty, 2007 WL 518651 (S.D.N.Y. Feb. 21, 2007), the court found that the Government's failure to prove that the specialist's customers were misled, defrauded or otherwise deceived precluded a finding of securities fraud under Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder.

As the NYSE specialist for General Electric (GE) stock, Finnerty maintained the stock's electronic order book and physical trading post at the NYSE. Under NYSE rules, a specialist is required to match open public purchase orders and public sell orders whenever possible. Interpositioning occurs when a specialist buys and/or sells stock on his principal account instead of matching public orders. NYSE rules permit interpositioning when necessary to maintain a "fair and orderly" market, but otherwise prohibit the practice.

At trial, the Government showed that Finnerty engaged in interpositioning even when there were matching public buy and sell orders for GE stock. Finnerty's interpositioning generated almost $4.5 million in profits for his principal account. Finnerty did this while knowing that his bonus was partially based on the profits he generated for the principal account.

In vacating the jury conviction, the court noted that Section 10(b) is intended to protect the investing public from deceptive acts in securities transactions. Thus, the court held, to prove a violation, the Government must prove deception. The court reasoned that in order to prove that Finnerty's interpositioning was deceptive, the Government first had to show the expectations of Finnerty's customers and how their expectations differed from what they actually received. According to the court, in this case, without proof of customer expectation there was no way for the Government to show that interpositioning had a tendency to deceive or the power to mislead.

The court found that the Government failed to prove Finnerty's customers' expectations. It held that Finnerty's violation of internal NYSE rules alone did not constitute a deceptive or fraudulent act and that the Government could not rely on those rules as a basis for customer expectation without first proving that Finnerty's customers were aware of the rules. The court also found that the Government failed to prove that, as a specialist, Finnerty owed a fiduciary duty to the public buyers and sellers of GE stock.