The 2nd U.S. Circuit Court of Appeals threw out the convictions of Michael Hayward and Michael Stern, who were convicted in July 2006 and sentenced to six months in prison.
Hayward, 57, and Stern, 55, who had worked for Van der Moolen Specialists USA LLC, were the only specialists still facing prison time after convictions at trial. They had been accused of stealing $1 million apiece by skimming small amounts of money from stocks they oversaw.
The ruling all but ended a prosecution in which the government accused the powerful floor supervisors of using their inside positions to earn an estimated $20 million illegally for themselves and their firms.
Specialists play the crucial role of matching buyers and sellers in individual stocks, though their numbers have declined as computers have taken a larger role in the trading of securities.
Prosecutors targeted the specialists after concluding that they sometimes pocketed pennies for themselves or their firms from each trade by purchasing a stock and quickly flipping it for a slightly higher price.
Defense lawyers had argued that it would be absurd for highly paid specialists — many of them have seven-figure incomes — to try to make minuscule amounts of money each day in such a way. Instead, they said, prosecutors were highlighting innocent mistakes made on fewer than 1 percent of trades each specialist handled.
"Mike Hayward is very happy to have been vindicated," said his lawyer, Jonathan Paul Bach.
"We are thrilled with the result and pleased that the Court of Appeals agreed that Mr. Stern should be cleared of all charges," said Stern's lawyer, David Meister.
Prosecutors declined to comment.
In February 2007, Judge Denny Chin in Manhattan reversed a jury verdict convicting David A. Finnerty, another specialist, of securities fraud.
Chin's decision was later upheld by the appeals court, which agreed that the government had failed to prove that Finnerty acted deceptively.
In tossing out the two convictions Wednesday, the appeals court noted that lawyers on both sides had conceded that the evidence used to convict Finnerty was largely indistinguishable from the proof used to convict Hayward and Stern.
Earlier, the government had dropped charges against seven of the 15 floor supervisors. Two others were acquitted, two had pleaded guilty and one defendant remains at large.
The U.S., European, and Swiss
central banks on Wednesday extended emergency lending
facilities for investment banks and expanded other liquidity
programs to ease credit market strains that have weighed on the
global economy for nearly a year.
The joint measures helped lift share prices in the United
States and Europe, and were a factor in pushing up U.S. bond
yields and the U.S. dollar.
The U.S. Federal Reserve said it was prolonging the
emergency credit facility for primary dealers to January 30
which had been due to expire in mid-September.
The Fed said it acted "in light of continued fragile
circumstances in financial markets," and said it would close
down the lending program once it determined credit market
conditions were no longer "unusual and exigent."
The Primary Dealer Credit Facility was launched in March
after the near bankruptcy of Bear Stearns and it marked the
first time since the Great Depression that the Fed had opened
its emergency lending to investment banks.
Some analysts said the latest action suggested the Fed
would be loathe to raise interest rates any time soon and
interest-rate futures showed traders trimming back bets on the
Fed raising rates this year.
"Until the Fed starts scaling back or eliminating its
special liquidity-providing measures, rate hikes would create a
glaring policy inconsistency -- conducting measures that
effectively lower borrowing rates while simultaneously raising
them," Michael Gregory, a senior economist at BMO Capital
Markets in Toronto, wrote in a note to clients.
The Fed also said it would offer longer-term loans to banks
under its Term Auction Facility, introducing 84-day offerings
in addition to its current 28-day loans. The TAF was
established in December to try to tamp down funding pressures.
The Fed plans alternate auctions of $75 billion in 28-day
credit, with offerings of $25 billion in 84-day funds every two
weeks. Credit outstanding at the Term Auction Facility would
total no more than $150 billion, as is currently the case.
In parallel, the European Central Bank and Swiss National
Bank said they would begin conducting U.S. dollar auctions with
84-day terms, in addition to their current 28-day offerings,
alternating on a bi-weekly basis. Auction maximums would be $2
billion for the SNB and $10 billion for the ECB.
The Fed said it would temporarily expand its dollar swap
line with the ECB to $55 billion from $50 billion. The Fed had
put in place swap lines with both the ECB and SNB so that those
central banks could provide dollars to European markets.
EXTRA LIQUIDITY HELPFUL
The announcements followed record demand for U.S. dollar
liquidity at the ECB's last 28-day auction, when banks bid for
more than four times the $25 billion on offer .
Economists and traders said the move, which pushed down
euro zone government bond and Euribor interest rate futures,
showed the seriousness of money market tensions a year after
the initial credit-market shock.
"The extra liquidity is helpful but there is more need for
funding over longer-term horizons," Commerzbank economist
Michael Schubert said.
The Fed's actions are the latest in a series of aggressive
steps, in conjunction with the ECB and the U.S. Treasury, to
calm financial market strains resulting partly from huge
writedowns by banks on mortgage related assets as U.S. house
prices have tumbled in the past year.
President George W. Bush on Wednesday signed into law a
sweeping housing market rescue package that would provide
mortgage refinancing for stressed borrowers and provide
emergency funding for mortgage market giants Fannie Mae (FNM.N)
and Freddie Mac (FRE.N).
A day earlier, the U.S. Securities and Exchange Commission
extended its crack-down on abusive short-selling in the stocks
of 19 major financial firms.
The Fed said that in addition to extending the PDCF, it
would also keep open through January 30 its Term Securities
Lending Facility, which provides liquid Treasury securities for
28 days in return for harder-to-trade collateral.
It also gave the go-ahead to the New York Federal Reserve
Bank to auction options to primary dealers to borrow Treasury
securities to ease funding pressures that often build as
financial quarters are drawing to a close.
Stocks cut gains while the Nasdaq
slipped into negative territory on Wednesday as oil prices rose
sharply, offsetting positive jobs data and efforts by U.S.
officials to boost liquidity in turbulent financial markets.
Bank shares trimmed some of their earlier gains and energy
companies' stocks rose as U.S. crude oil prices jumped more
than $2 per barrel, after falling for most of the morning and
closing sharply lower on Tuesday.
The spike in oil prices took some of the shine off an ADP
Employer Services' report that showed that U.S. private-sector
employers added 9,000 jobs in July, suprising economists who
had expected a fall in that number.
The report encouraged investors to bet the government's
more comprehensive labor market report due on Friday will paint
a brighter picture for the U.S. economy -- supporting shares of
consumer products companies such as General Electric Co (GE.N)
and Procter & Gamble Co (PG.N).
"The ADP was encouraging. If they're on the right track and
Friday's payroll number comes in better than expected, than
that would be very positive," said Bill Strazzullo, partner and
chief market strategist at Bell Curve Trading in Boston.
The Dow Jones industrial average (.DJI) rose 66.44 points,
or 0.58 percent, to 11,464.00, while the Standard & Poor's 500
Index (.SPX) added 5.96 points, or 0.47 percent, to 1,269.16.
But the Nasdaq Composite Index (.IXIC) slipped 11.89 points, or
0.51 percent, to 2,307.73.
Shares of Exxon Mobil Corp (XOM.N) gained 1.4 percent to
$82.05, driving the S&P 500 up.
Shares of financial companies were still supported by a
decision by the U.S. Federal Reserve and other central banks to
extend liquidity offerings to stressed banks and securities
firms. For details, see .
In addition, U.S. securities regulators extended through
August 12 an emergency rule aimed at curbing abusive short
selling in the stocks of Fannie Mae (FNM.N) and Freddie Mac
(FRE.N), as well as 17 other major financial firms.
The combination of both measures "shows that the Fed and
the SEC are really coming in trying to defend the stock market,
and financials in particular, and doing their best to calm
individual investors' fears that are out there still," said
Ryan Detrick, technical analyst at Schaeffer's Investment
Research in Cincinnati.
Bank of America's (BAC.N) shares rose 1.5 percent to $32.70
while Citigroup (C.N) climbed 1 percent to $18.62. Merrill
Lynch (MER.N) gained 0.3 percent to $26.33 even as investors
wondered whether the investment bank and brokerage has finished
cleaning its balance sheet after saying it will write down $5.7
billion related to credit losses and raise $8.55 billion by
selling new stock.
Shares of Fannie Mae (FNM.N) rose 3 percent to $11.95 on
the SEC's emergency extension of its short-sale rule as well as
on news that President George W. Bush had signed into law a
housing rescue plan passed by Congress, which includes a
government lifeline to the two housing finance companies.
Shares of Elan Corp (ELN.I)(ELN.N) plunged 39.8 percent to
$20.35 while Wyeth (WYE.N) dropped 12.6 percent to $39.46 after
a drug trial showed the risk of a potentially serious side
effect in a new Alzheimer's drug jointly developed by the
companies. Wyeth was the biggest drag on the S&P 500.
Garmin Ltd (GRMN.O) was the biggest drag on the Nasdaq as
its stock sank 19.1 percent to $36.48 after the maker of
personal navigation devices slashed its profit and revenues
forecasts for 2008.
(Additional reporting by Kristina Cooke; Editing by Jan