Legal News

2nd Cir. Reverses Convictions in Specialist Cases; SDNY Loses Again

By Dan Slater

When it comes to prosecuting so-called specialist traders, SDNY prosecutors are making a rough go of things. A couple weeks ago, we told you about the Second Circuit Court of Appeals upholding the acquittal of David Finnerty, a former specialist trader at Fleet Specialist, who had been accused of making improper trades for his firm’s account at the NYSE. Today, the Second Circuit reversed the convictions of two more specialists — Michael Hayward and Michael Stern, formerly of Van der Moolen Specialists USA.

Hayward and Stern had been convicted, following jury trials, of securities fraud for allegedly trading for their proprietary accounts instead of matching executable buy and sell orders from NYSE customers. (Specialist traders match buyers and sellers at the NYSE — now part of NYSE Euronext — and provide liquidity by buying or selling shares when there is an imbalance on the floor.) According to a report by WSJ colleague Chad Bray (link unavailable), the government had argued at trial that Hayward and Stern violated federal securities laws by engaging in interpositioning - improperly stepping between public buy and sell orders and trading for their firm’s account.

In overturning the conviction, the Second Circuit writes, in a three-page order, “Since the Government concedes that Defendants’ conduct was not manipulative, the question is whether the Government sufficiently proved that it was deceptive . . . In Finnerty, we observed that “‘deception’ . . . irreducibly entails some act that gives the victim a false impression,” but the Government “identified no way in which Finnerty communicated anything to his customers, let alone anything false.”

At most, the court explains, Finnerty violated an NYSE rule, but violation of an NYSE rule does not a case for civil liability make. “Finnerty compels the same result here.”

Cooley Godward’s Jonathan Bach repped Hayward, while Stern turned to Clifford Chance’s David Meister.

For the prosecution, AUSA Lauren Goldberg.

Full post as published by Law Blog - WSJ.com on July 30, 2008 (boomark / email).