Remember that David Finnerty case we mentioned yesterday. You know, the one with the New York Stock Exchange specialist who the government accused of improperly inserting themselves in between customer trades. The one that the judge threw out yesterday because the prosecutors failed to show that the customers had any expectation that Finnerty wasn't interpositioning himself in their trades. Today Larry Ribstein wonders whether this case might undermine some of the theory beneath the case against brokerage firms accused of making money by trading on advance knowledge of trades by big customers. If the customers expected that the brokerages were going to do this, does this make it all okay?
Well, a lot of folks look at that kind of trading as a form of illegal "insider trading." But is it? Ribstein sounds a skeptical note.
Possibly. But is this speculation trading on material inside information? There are a lot of facts here that need to be unraveled, and perhaps the SEC should be looking into them. The danger is that all of this is going to disappear into the black hole of a criminal investigation and trial. After all, there's the whiff of "insider trading," which ramps up the feverish public demand that regulators and prosecutors "do something."
But a criminal trial is not the way to find out the institutional background necessary for a worthwhile regulatory fix. It's a long and expensive process, replete with procedural roadblocks. The whole thing could end the way the NYSE specialist cases did – ten out of 15 cases aborted or lost, with this negative result in the Finnerty case.