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Abstract

The decision of the Second Circuit in United States v. Finnerty (Finnerty III) was the culmination of a number of District Court decisions that found that specialists on the New York Stock Exchange (NYSE) could not be held liable for fraud under Rule 10b-5 for interpositioning, whereby they put themselves between buy and sell limit orders, in violation of NYSE rules, and profited on the spread. Finnerty III and its District Court sibling decisions were wrongly decided. Specialists presented a uniquely thorny issue of agency law to the Federal Courts in New York. This issue was under-analyzed by the Federal Prosecutors and left the courts without a coherent theory of fiduciary duty for specialists. This Note will demonstrate that there is a fiduciary relationship between specialists and their public customers and will untangle that relationship to show that it prohibits interpositioning and that interpositioning was fraud under Rule 10b-5.

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