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The Vindication of David Finnerty

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We spent a good part of our weekend drinking bourbon in the mountains of upstate New York and talking about the implications of a legal matter we somehow neglected to write about in this space last weekend--the vindication of David Finnerty, the former specialist trader at Fleet (now Bank of America).
Three years ago, Finnerty was accused--along with 14 other specialists--by the US attorney's office in New York of committing securities fraud in the form of "interpositioning," which involves a specialist improperly using his position to profit by buying and selling securities for his own account in between buy and sell orders placed by customers. In 2006, a jury quickly convicted Finnerty after the briefest deliberations.
The conviction was overthrown by the trial judge, who said the prosecution failed to present evidence that Finnerty had deceived anyone. In order to commit fraud, their must be deceived party and an intent to deceive. It was never proven that Finnerty's customers were misled by this age old practice among specialists or that Finnerty sought to deceive his customers.
Last week the Second Circuit's three judge panel unanimously upheld the acquittal, which will put an end to the case. This ruling should provide grounds for appeals by two other accused specialists who were convicted, and perhaps even for the two who already pleaded guilty. (Two others were acquitted and one is a fugitive.)
The case is another blow against the series of cases brought by then New York Attorney General Eliot Spitzer and federal prosecutors against the New York Stock Exchange. Those accusations painted the picture of an exchange rife with fraud and corruption, a picture which increasingly seems to have been seriously misconceived. We won't go so far as to say the prosecutions were fraudulent from the start, which may be why we never became government prosecutors.
We will say, however, that the Finnerty matter demonstrates the wrong-headedness of treating cases of this sort as criminal matters, rather than civil cases or addressing them through regulation. The criminal process is slow, costly and inelegant. And, all too often, ends in embarrassment for the government even after they've ruined the careers (and sometimes lives) of the wrongly accused.