Ruling makes insider-trading cases a harder sell

Insider trading cases got harder to make Wednesday after a key federal court raised the bar on what prosecutors must prove, in a ruling that also imperils a handful of victories for the Justice Department in its multiyear probe.

Traders must know their tip came from someone who not only knew it was secret, but got something for leaking it, the U.S. Court of Appeals in New York said Wednesday. In doing so, it threw out convictions of hedge fund managers central to Manhattan U.S. Attorney Preet Bharara's investigation of illicit trading.

Level Global Investors L.P. cofounder Anthony Chiasson and ex-Diamondback Capital Management L.L.C. portfolio manager Todd Newman argued their convictions should be overturned because jurors weren't told that to find them guilty, prosecutors must show the additional element that they knew the original source received a benefit.

The decision draws a bright line in what was a murky area of securities law, making it tougher to charge traders the farther away they are from the source of information. While the court is one of a dozen appellate jurisdictions, it includes Wall Street and has purview over Bharara's convictions, making the ruling a powerful national precedent.

Bharara said in a statement he was considering an appeal.

The unanimous three-judge panel threw the case out "with prejudice," essentially exonerating the men and barring retrial. In doing so, it undercut the convictions of others swept up in Bharara's probe, including SAC Capital Advisors L.P. fund manager Michael Steinberg, whose jury received the same faulty instructions. His appeal has been delayed by the current case.

The "decision clearly means that Michael Steinberg is innocent of any crime and his conviction will be vacated as well," Steinberg's lawyer, Barry Berke, said.

Steinberg's conviction was among the biggest victories for Bharara in his prosecution of Wall Street wrongdoing, and at SAC Capital in particular. The probe's main target, SAC Capital founder Steven A. Cohen, wasn't charged or sued.

In defending the convictions, prosecutors argued the information the fund managers received was so detailed and so "overwhelmingly suspicious" that they should have known it was illicitly obtained.

The court disagreed, saying prosecutors had provided "scant information" Chiasson and Newman had such knowledge in allegedly perpetrating a $72 million insider trading scheme.

Bharara, in a statement Wednesday, said the ruling "will limit the ability to prosecute people who trade on leaked inside information," adding that the ruling "appears" to narrow what was considered insider trading.

"We investigated and prosecuted misconduct based on our good faith assessment and understanding of the facts and the law that existed at the time," he said.