By LARRY NEUMEISTER
Associated Press

NEW YORK - A federal appeals court dealt what was likely to be the final blow to the ill-fated prosecution of 15 New York Stock Exchange specialists Wednesday by overturning the securities-fraud convictions of two of the floor supervisors.

The 2nd U.S. Circuit Court of Appeals threw out the convictions of Michael Hayward and Michael Stern, 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 match 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 to try to make minuscule amounts of money in such a way. 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 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, Hon. Denny Chin reversed a jury verdict convicting specialist David Finnerty of securities fraud. That decision was 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.

The government dropped charges against seven of the 15 floor supervisors. Two others were acquitted, two pleaded guilty and one defendant remains at large.