By Christopher M. Matthews
A federal judge allowed four men to withdraw their
insider-trading guilty pleas on Thursday, the latest fallout from a
pivotal appeals court ruling in December that has put new
limitations on prosecutors' ability to pursue such cases.
The four men, who allegedly traded on tips about International
Business Machine Corp.'s 2009 $1.2 billion acquisition of software
company SPSS Inc., pleaded guilty in 2013 and 2014 to insider
trading. But they asked to withdraw those pleas after a three-judge
panel in the Second U.S. Circuit Court of Appeals overturned two
insider-trading convictions in December and said prosecutors had
been too aggressive in their interpretation of the law.
U.S. District Judge Andrew L. Carter Jr., who is presiding over
the IBM case, agreed on Thursday, saying that in light of the
Second Circuit ruling he would allow the four men to enter not
guilty pleas. It is the first time since the December decision a
judge has allowed similar insider-trading defendants to withdraw
their guilty pleas.
The move comes as prosecutors face a Friday deadline to tell the
Second Circuit whether they will ask for further review of its
decision. The U.S. could ask for the entire court to look at the
case or could appeal to the Supreme Court, which both require
signoff from the Justice Department. It could also ask the same
panel to re-review its decision, which doesn't require
approval.
The stakes are high for the Manhattan U.S. attorney's office,
which has had a recent run of insider-trading convictions in a
closely watched effort that has featured charges against high-level
traders at some of the country's biggest hedge funds. In the wake
of the Second Circuit decision, a number of defendants have asked
to have their cases tossed.
Most recently, on Thursday, former Galleon Group trader Zvi
Goffer said in court papers he would ask a federal judge to toss
his insider trading conviction and 10-year sentence. Legal experts
said judges rarely allow defendants to pull pleas but Judge
Carter's move could presage additional rescissions.
"This is but one ripple, and is yet a small one, from the Second
Circuit's decision," said Columbia Law School Professor Daniel C.
Richman. "I think it's fair to say there's more to come."
The Second Circuit's decision overturned the December 2012
convictions of former hedge-fund traders Todd Newman and Anthony
Chiasson in New York federal court. The appeals court said
prosecutors must prove traders knew that the person who provided an
inside tip gained some sort of tangible reward for doing so. The
court also dismissed prosecutors' contention that career advice or
friendship constituted a reward, saying that, under that logic,
"practically anything would qualify."
The defendants in the IBM case seized on the Second Circuit's
statements about what constitutes a benefit. In court papers this
month, the men-- Trent Martin, Thomas Conradt, David Weishaus and
Daryl Payton--argued no benefit was provided to a lawyer who
allegedly leaked the deal's details to Mr. Martin. They said there
was only friendship and no benefits exchanged between the other
defendants, who passed around Mr. Martin's tip.
A fifth defendant in the case, Benjamin Durant, pleaded not
guilty and was scheduled to go to trial.
Prosecutors had argued the Second Circuit decision was
incorrect, didn't apply to this case and the pleas should
stand.
Lawyers for Mssrs. Martin, Conradt and Payton said Thursday
Judge Carter made the correct decision. A lawyer for Mr. Weishaus
declined to comment. A lawyer for Mr. Durant didn't immediately
respond to a request for comment.
A spokesman for the Manhattan U.S. attorney's office declined to
comment.
The Second Circuit's December ruling tarnished the Wall Street
crackdown of New York U.S. Attorney Preet Bharara, which had
yielded more than 80 convictions.
In addition to the IBM pleas, the ruling threatens to upend a
handful of other convictions, including the marquee conviction of
former SAC Capital portfolio manager Michael Steinberg.
On Thursday, Judge Carter said he was directly influenced by the
appeals court's decision.
"Specifically, the Court was skeptical that the pleas were
sufficient in light of [the ruling's] clarification of the personal
benefit and tippee knowledge requirements of tipping liability for
insider trading," he wrote in a three-page order.
The IBM case isn't necessarily over, as the indictment against
the men remains pending. Mssrs. Durant and Payton have asked Judge
Carter to toss that as well, which would end the case altogether,
an issue the judge said he would address at a hearing Friday.
Mr. Richman said that while the Second Circuit decision was
likely to undo other cases, its largest impact is the constraints
it puts on prosecutors.
"It looks bound to be an obstacle to a range of cases that might
otherwise be pursued," he said.
Write to Christopher M. Matthews at
christopher.matthews@wsj.com
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