A recent federal appeals court decision highlights the tension between the determination of the U.S. Department of Justice to advance new theories of liability for securities fraud and the courts' commitment to traditional theories of proof.

In United States v. Finnerty, the U.S. Court of Appeals for the Second Circuit held that a New York Stock Exchange specialist had not committed fraud, finding that the government had failed to prove that his actions had deceived the public or affected stock prices.

The government charged that the specialist engaged in "interpositioning," which is inserting an extra broker or dealer on a trade or deal to inappropriately generate an additional commission. The Second Circuit said the government evidence showed that the specialist had broken NYSE rules, but ruled that such a violation "does not establish securities fraud in the civil context, let alone in a criminal prosecution." According to the ruling, "there must be some proof of manipulation or a false statement, breach of a duty to disclose or deceptive communicative conduct."

For more information on current trends in securities fraud prosecutions, please contact John C. Grugan at gruganj@ballardspahr.com,  Henry E. Hockeimer, Jr., at hockeimerh@ballardspahr.com, or Justin P. Klein at kleinj@ballardspahr.com.


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