Breaking securities rules not enough to prove criminal fraud: Second Circuit

[JURIST] The US Court of Appeals for the Second Circuit [official website] on Friday upheld [opinion, PDF] the acquittal of David Finnerty, a former specialist trader at Fleet Specialist Inc., a subsidiary of FleetBoston Financial Corp., who had been accused of making improper trades for his firm’s account on the New York Stock Exchange (NYSE) [official website]. The three-judge panel unanimously decided that while Finnerty broke NYSE rules, prosecutors failed to prove that his conduct was deceptive, an essential element of the crime:

Th[e] evidence shows that Finnerty knew he had violated an NYSE rule, and tried to cover it up. But violation of an NYSE rule does not establish securities fraud in the civil context, let alone in a criminal prosecution... Finnerty may have known that interpositioning was wrong within the context of his employment, and that it put him at risk professionally, but an awareness of peril, a guilty conscience or an impulse to cover one’s tracks does not bespeak criminally fraudulent conduct within the context of the securities laws.
In 2005, Finnerty and 14 other brokers were indicted on charges of “interpositioning,” a process in which brokers step in front of their customers to intercept trades at more favorable prices. A jury found Finnerty guilty of three counts of securities fraud in October 2006. That judgment was reversed [opinion, PDF] in February 2007 by US District Judge Denny Chin, who held that the government had not proven the defendant’s conduct defrauded customers. Prosecutors suspect that Finnerty’s conduct resulted in illegal profits of approximately $4.5 million. CNN has more.

Bank of America [CBS News report on merger] has since acquired FleetBoston Financial Corp. and has been subject to litigation based on events which allegedly occurred prior to the merger. One class action lawsuit was brought seeking recovery for damages caused by the alleged "timing" [Stanford Law backgrounder] of mutual fund trades so as to benefit preferred clients at the expense of other investors. A previous action alleged fraudulent conduct in the description of credit card fees [Legal Intelligencer report].


 

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