The Second Circuit affirmed Judge Denny Chin’s judgment of acquittal of New York Stock Exchange specialist David Finnerty in United States v. Finnerty, 2008 U.S. App. LEXIS 15296 (2d Cir. July 18, 2008). Finnerty was charged with a criminal violation of § 10(b) and Rule 10b-5 by “interpositioning,” which the Court defined as arbitraging the spread between bid and ask on securities for which the specialist was responsible. “A specialist engages in interpositioning when he ‘prevent[s] the normal agency trade between matching public orders and instead interpose[s]’ himself ‘between the matching orders in order to generate profits’ for the principal account — -in other words, when the specialist acts as an arbitrager by taking a profit on the spread between the bid price and the ask price of customers' orders.” From the opinion:

The government admits that Finnerty made no misstatement. The government told the jury that the "real issue" in the case was "whether David Finnerty directed" the interpositioning trades and whether he did it "intentionally and with the intent to defraud." This was, in essence, a theory of non-verbal deceptive conduct.

"Conduct itself can be deceptive," and so liability under § 10(b) or Rule 10b-5 does not require "a specific oral or written statement." Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 128 S. Ct. 761, 769 (2008). Broad as the concept of "deception" may be, it irreducibly entails some act that gives the victim a false impression. "Theft not accomplished by deception (e.g., physically taking and carrying away another's property) is not fraud absent a fiduciary duty." In re Refco Capital Markets, Ltd. Brokerage Customer Sec. Litig., 2007 WL 2694469, at *8 (S.D.N.Y. Sept. 13, 2007) (Lynch, J.) (internal citation omitted). ***

Like a thieving bank teller, the government argued, Finnerty had the motive and the means to profit from interpositioning. But there is no evidence that Finnerty conveyed an impression that was misleading, whether or not it could have a bearing on a victim's investment decision in connection with a security. We need not decide whether some form of communication by the defendant is always required to prove deception (although that is the template of virtually every case). To impose securities fraud liability here, absent proof that Finnerty conveyed a misleading impression to customers, would pose "a risk that the federal power would be used to invite litigation beyond the immediate sphere of securities litigation and in areas already governed by functioning and effective state-law guarantees." Stoneridge, 128 S. Ct. at 771.