Securities Fraud Verdict Reversed- New York

Judge Denny Chin reversed the jury verdict of David A. Finnerty who had been convicted in October of securities fraud in U.S. District Court in Manhattan.^[1] He found that the evidence did not support the fraud conviction of the former New York Stock Exchange supervisor who once oversaw all trading in General Electric Co. stock. ^[2]

Chin said he was reversing the verdict and ordering a judgment of acquittal because the government had failed to prove Finnerty engaged in fraudulent or deceptive conduct within the meaning of securities laws.^[3]

To convict a defendant of securities fraud, the government must show that the defendant had intent to deceive, manipulate, or defraud, though it need not prove that the defendant intended to cause harm to the victim of the fraud.^[4]

The ruling was the latest blow to the government's pursuit of criminal charges against 15 NYSE floor supervisors accused of using their inside positions to earn an estimated $20 million illegally for themselves and their firms.^[5]

Of the 15, the government had already dropped charges against seven, two others were convicted, two were acquitted and two had pleaded guilty while one defendant remains at large. ^[6]

Chin said the government had failed to prove that Finnerty's customers were misled, defrauded or otherwise deceived and said there were ''thorny'' issues raised by the case including questions about what customers expected of specialists and whether they even understood the job of a specialist.^[7]

To be convicted of securities fraud under 15 U.S.C. § § 77a & 78a, the government must present evidence that would prove beyond a reasonable doubt: That the defendant used a device or scheme to defraud someone, made an untrue statement of a material fact, or failed to disclose a material fact which resulted in making the defendant's statements misleading; that the defendant's acts were, or failure to disclose was, in connection with the purchase or sale of securities; that the defendant used the mail or telephone in connection with these acts or this failure to disclose; and that the defendant acted for the purpose of defrauding buyers or sellers of securities.^[8]

Prosecutors had brought the cases after saying specialists had violated rules requiring them to match up buyers and sellers at the best possible prices and are not permitted to buy or sell a stock with their own firm's money unless there is only one party seeking the transaction.^[9]
Chin noted that prosecutors emphasized the fact that Finnerty traded for a profit for his firm nearly 95 percent of the time, but he said historically specialists have made a profit in the overwhelming majority of their proprietary trades.^[10]

Fraudulent intent need not be proved directly and can be inferred from the facts and circumstances surrounding a defendant's actions. [11] ''But, evidence that Finnerty was good at what he did and was well compensated for his efforts was hardly compelling evidence that he engaged in securities fraud,'' Chin wrote.^[12] He said the government's repeated reference to 26,300 instances when Finnerty supposedly traded improperly for his firm was unduly prejudicial because it was ''clearly and significantly overstated,'' failing to account for the times when Finnerty was not executing trades himself. ^[13]

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[1] Larry Neumeister, Judge Reverses Conviction of NYSE Specialist, Associated Press via Daily Report, February 22, 2007.
[2] Id.
[3] Id.
[4] United States v. Dixon, 536 F.2d 1388, 1396 (2d Cir. 1976).
[5] Neumeister, supra note 1.
[6] Id.
[7] Id.
[8] 15 U.S.C. §§ 77a, 78a (2005).
[9] Neumeister, supra note 1.
[10] Id.
[11] United States v. Flynn, 196 F.3d 927, 929 (8th Cir. 1999).
[12] Neumeister, supra note 1.
[13] Id.