Extract
Institutional factors bearing on criminal charging decisions in complex regulatory environments.
In April 2005, federal prosecutors brought novel securities fraud charges against fifteen former traders, known as "specialists, "from the New York Stock Exchange (NYSE). The indictment alleged that the specialists abused their positions on the NYSE floor between 1999 and 2003, resulting in $19 million in harm to investors. Prior to these charges, the specialists' trading practices had already been reviewed and sanctioned by Congress, the Securities and Exchange Commission (SEC), and the NYSE. Indeed, many of the traders had already been dismissed from the NYSE. Despite some limited early success, very few of these prosecutions ended in convictions.
This Article focuses on the framework established by the constitutional allocation of power to the main institutions of the criminal justice system: prosecutors, juries, legislatures, and courts. It applies this framework to the cases against the specialists, examining their history, regulation, indictment, and legal defenses. By doing so, it seeks, first, to shift the discussion of criminal charging decisions toward an inquiry that focuses more on the institutions involved in the process and, second, to add precision to the questions of when and whether it is worthwhile to call on the institutions of the criminal justice system. The cases against the specialists provide an example of the potential utility of this framework and the degree of care necessary in making a criminal charging decision. Although many factors bear on prosecutorial discretion besides regulatory enhancement, hindsight regarding these cases cautions that charging decisions in complex environments involving multiple layers of overlapping regulation can be exceedingly delicate. INTRODUCTION I. SETTING THE SPECIALISTS' SCENE: WHAT HAPPENED AND TO WHOM? A. The Settlements: SEC, NYSE & The Specialist Firms B. Punishing Individual Specialists C. Congressional Hearings D. The Criminal Charges II. THE LANDSCAPE: THE PRELIMINARY QUESTIONS OF How AND WHY? A. The Specialists' Task B. Specialists' Functions and Obligations C. Trading Ahead and Interpositioning D. NYSE Regulation, Inc. and the NASD Merger III. EFFICACY OF THE JURY TRIAL A. Juror Comprehension: Factual Complexity and Legal Instructions B. Strategic Trial Presentations 1. Simplification 2. "Piling On" C. Jurors as Securities Regulators? IV. GETTING IN THE COURTHOUSE: POTENTIAL PRETRIAL DEFENSES A. The Rule of Lenity B. Fair Notice: Novel Theories of Fraud C. "Minor Violations" V. CRIMINAL CHARGES AS SUPPLEMENTS TO THE REGULATORY ENVIRONMENT A. The Regulatory Environment: Multiple "Pyramids" B. Criminal Charges: Benefit or Burden? 1. Criminal "Prohibitions" in Complex Environments 2. Assessing the Specialists' Utility CONCLUSION INTRODUCTION In April 2005, federal prosecutors brought criminal charges against fifteen former traders on the New York Stock Exchange (NYSE). These were "securities fraud charges in an area where criminal charges had never been brought," (1) against a class of traders, known as "specialists," that operates at the core of the U.S. capital markets. Where possible, the specialists were supposed to match buyers and sellers seeking to make trades on the exchange. Regulators, however, had uncovered instances where specialists violated NYSE rules by trading with investors using funds and stocks from their own banks' accounts instead of simply arranging trades at best-available prices between willing buyers and sellers. The indictment alleged that the specialists abused their positions on the NYSE floor between 1999 and 2003 to effectuate these types of trades, resulting in $19 million in harm to investors. (2) Prior to the criminal charges, the specialists' practices had already been reviewed and sanctioned by Congress, the Securities and Exchange Commission (SEC), and the NYSE itself. Despite the fact that the specialists had already been banned from the stock exchange floor by the NYSE, the U.S Attorney declared: "We've excised a large tumor from the stock exchange. (3) The government had some limited early success with the cases against the specialists, securing two guilty pleas and three trial convictions. But courts and juries slowly began to find weaknesses in the cases. Two juries acquitted. Shortly thereafter, charges against three other specialists were dropped. In November 2006, the U.S. Attorney's Office dropped the remaining charges. The final symbolic blow came in February 2007 when, following a jury's guilty verdict, the judge entered post-verdict judgment of acquittal on the grounds that the trial evidence was insufficient as a matter of law to prove securities fraud. (4) Just over a year after that decision, regulators at all levels started to struggle to stem the tide of financial losses from turmoil within the credit markets. Congress is working to craft legislative solutions, (5) the Federal Reserve has called for broader regulatory authority to police the nation's banking channels, (6...See the full content of this document
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