Insider trading defendants may pull pleas as prosecutors scramble

NEW YORK/WASHINGTON (Reuters) - Some defendants who previously pleaded guilty to insider trading charges will try to withdraw their pleas, their lawyers said, as U.S. authorities scrambled Thursday to respond to an appellate court ruling which chipped away at the foundations of a series of recent convictions.

After the ruling, a top regulator expressed concern about its "overly narrow" view. In a further sign of how the U.S. Justice Department's hand has been weakened, prosecutors in Manhattan sought to delay the schedule of one case set for trial in January.

On Wednesday, the 2nd U.S. Circuit Court of Appeals in New York said prosecutors presented insufficient evidence to convict Todd Newman, a former portfolio manager at Diamondback Capital Management, and Anthony Chiasson, co-founder of Level Global Investors.

U.S. Securities and Exchange Commission Chair Mary Jo White said Thursday "there is no question it's a significant decision," adding her agency was reviewing the ruling.

"My initial sense of it is that it took ... an overly narrow view of the insider trading law and that is a concern," White said, speaking at a New York conference.

Some defendants who cooperated and pleaded guilty in the prosecution of Newman and Chiasson are now considering taking the extraordinary step of withdrawing their pleas, two lawyers said Thursday.

The three-judge panel not only found that prosecutors needed to prove a trader knew that the original source of non-public information has received a benefit in exchange for the tip, but also narrowed what actually constituted such a benefit.

In several such cases, the defendants were tipped based on information they received third or fourth hand, rather than straight from the source, which made it tougher to prove their awareness that source had obtained something tangible in return.

The ruling threatens to challenge a broad insider trading crackdown underway since 2009 under Manhattan U.S. Attorney Preet Bharara, whose office during his tenure has secured 82 other convictions.

'WORTH STUDYING'

While the pace of prosecutions had looked set to gradually slow from the breakneck pace of recent years, the appeals court's ruling could slam the brakes on authorities' efforts to pursue future cases.

Many on Wall Street say that despite Bharara's thrusts against the practice, trading on privileged information remains common amid the current M&A boom, with Merck & Co's acquisition of Cubist Pharmaceuticals Inc just the latest to have seen unusual options activity before the deal announcement.

Among those threatening to withdraw plea deals is Danny Kuo, a former Whittier Trust Co analyst who pleaded guilty in 2012 and turned cooperator. Roland Riopelle, Kuo's lawyer, said in an interview he had calls into the U.S. Attorney?s Office. While he had not made a definite decision, the issue was "certainly worth studying."

"If there's no crime there, that's a good reason to withdraw your plea," he said.

Kuo was nearly sentenced to six months in prison in July by U.S. District Judge Richard Sullivan, whose ruling in the Newman and Chiasson case was subject to the appeal.

But Sullivan delayed sentencing, saying if the 2nd Circuit reversed him and required proof a tippee knew an insider received something for non-public information, he was "not sure, frankly, in the guilty plea there's a sufficient basis to conclude that Mr. Kuo had that knowledge."

The ruling may also benefit Michael Steinberg, a SAC Capital portfolio manager convicted in 2013 and later sentenced to 3-1/2 years in prison as part of the same conspiracy.

Steinberg had raised similar arguments on appeal as Newman and Chiasson, and his lawyer, Barry Berke, said Wednesday the ruling meant his conviction would be vacated as well.

Separately, prosecutors sought to suspend a pretrial schedule for a Jan. 12 trial of a former stockbroker, Benjamin Durant, who faces charges that he illegally traded in a company's stock based on a tip that IBM Corp would acquire it.

In a letter late Wednesday, Bharara's office said the earlier ruling raised "potential legal issues" that could affect the trial. Durant's lawyer did not respond to a request for comment.

'BIG SHIFT'

Beyond pending cases, the ruling could also affect pending investigations involving similar chains of tippees, said Glenn Kopp, a former prosecutor at Bracewell & Giuliani.

That would especially be true, he said, if authorities were sitting on cases following oral arguments in the case in April, at which some judges voiced skepticism of the prosecution's interpretation of the law.

"Could it impact more cases? Absolutely," Kopp said.

As hedge fund managers and their lawyers digested Wednesday's news, many began speculation about how the decision might impact their industry in the weeks and months ahead, with one former prosecutor who didn't want to be identified saying he thought it could lead to firms seeking tips more aggressively.

?I think people will be conservative for a while to start,? he said, adding that after a while, traders would likely start to make on-the-spot decisions that fell into a riskier category. ?I think people will feel freer to send their analysts out to get information and they?ll take more risks.?

(Reporting by John McCrank, Nate Raymond, Emily Flitter, Svea Herbst in New York, and Aruna Viswanatha in Washington, writing by Aruna Viswanatha; Editing by Chizu Nomiyama and Christian Plumb)