The defendant, David Finnerty, was charged with three counts of securities fraud under Section 10(b) and Section 32 of the Securities Exchange Act. The indictment alleged that while Finnerty was employed by Fleet Specialists, Inc., he caused approximately 26,300 instances of interpositioning, a practice in which a specialist on the New York Stock Exchange trading floor acts as an arbitrager by taking a profit on the spread between the bid price and the ask price of the customers’ orders. Prior to trial, the district court let stand only the government’s allegations that were based on subsections (a) and (c) of Rule 10(b)-5. At trial, the government presented evidence that demonstrated Finnerty had executed interpositioning trades, and the jury rendered a guilty verdict on all three counts. However, after trial, Judge Chin of the United States District Court in the Southern District of New York granted Finnerty’s post-trial motion for a judgment of acquittal on the ground that the government failed to prove that interpositioning constituted a deceptive act within the meaning of the federal securities laws. On appeal, the Second Circuit affirmed.
The Second Circuit explained that Finnerty could be guilty of violating Section 10(b) of the 1934 Act only if he said or did something deceptive. The court noted that at trial the government did not identify any way in which Finnerty communicated anything false to his customers or conveyed any impression that was misleading. The court further rejected the government’s argument that Finnerty was guilty because some customers may have understood that NYSE rules prohibit specialists from interpositioning and therefore assume that such a practice would not occur. The court held that Finnerty could not violate Section 10(b) unless his customers’ understanding was based on Finnerty’s statements or conduct. Finally, the court held that even if the government proved that Finnerty knowingly violated an NYSE rule, the violation of an NYSE rule does not establish securities fraud. As such, the court affirmed the district court’s judgment of acquittal. (U.S. v. Finnerty, 2008 WL 2778830 (2d Cir. July 18, 2008))