NEW YORK: A court ruling that sharply curtailed the ability of prosecutors including Manhattan US Attorney Preet Bharara to pursue insider trading cases is increasingly testing regulators' abilities across the country.
Defendants in California and Massachusetts have sought to take advantage of a December ruling from the 2nd US Circuit Court of Appeals in New York that narrowed the definition of insider trading, making it harder for prosecutors to pursue their cases.
The challenges raise the possibility that the 2nd Circuit decision, legally binding only in New York, Connecticut and Vermont, could be adopted by other jurisdictions nationally or could create a split among the federal courts.
The ruling reversed the convictions of Todd Newman, a former portfolio manager at Diamondback Capital Management, and Anthony Chiasson, co-founder of Level Global Investors.
A three-judge panel held that prosecutors need to prove a trader knew the original source of a tip received a benefit in exchange for the information. It also narrowed what constitutes a benefit, saying it must be of "some consequence" and cannot be only friendship. Samuel Lieberman, a defense lawyer involved in a similar challenge, said judges across the country often look to the 2nd Circuit for guidance.
"The 2nd Circuit is the leading appeals court for insider trading," he said. "So disregarding it comes with some peril."
While the pace of prosecutions had looked set to slow from the pace of recent years, the appeals court's ruling could slam the brakes on authorities' efforts to pursue future cases. The decision's effect was quickly felt in New York, where Bharara's office on Friday filed papers asking the court to reconsider the ruling.
Bharara's office has charged 92 people with insider trading since October 2009 and had won guilty pleas or trial convictions of 86 of them, including Galleon Group hedge fund founder Raj Rajaratnam and former SAC Capital Advisors trader Mathew Martoma, before the 2nd Circuit ruling.
Many of those cases are unlikely to be affected by the ruling, because the benefits were financial and known to the traders. But some defendants have already sought to vacate guilty pleas and reverse trial convictions in light of it.
In the first decision to follow the 2nd Circuit ruling, a federal judge in Manhattan on Thursday threw out the guilty pleas of four men accused of illegally dealing in shares ahead of an IBM Corp acquisition.
A spokeswoman for Bharara declined comment, but in court papers Friday, his office argued the 2nd Circuit ruling "threatens the effective enforcement of the securities laws".
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