Judge Vacates Guilty Pleas of Men Charged With Insider Trading in I.B.M. Stock

The fallout from a federal appellate ruling in December that narrowed the definition of what constitutes insider trading continues to affect other cases.

A federal judge on Thursday, citing the appeals court ruling, vacated the guilty pleas of four men charged with trading on inside information about I.B.M. Judge Andrew L. Carter Jr. of the Federal District Court in Manhattan did not yet decide whether to dismiss the charges altogether.

Judge Carter’s ruling comes a day before federal prosecutors in Manhattan must decide whether to appeal the precedent-setting ruling by a three-judge panel of the United States Court of Appeals for the Second Circuit. That unanimous decision not only overturned the insider trading convictions of two former hedge fund traders, Todd Newman and Anthony Chiasson, it also dismissed the charges against them.

Preet Bharara, the United States attorney for Manhattan, has indicated the his office wants to challenge the appeals court ruling. Prosecutors working for Mr. Bharara had argued that the appellate ruling in the case against Mr. Chiasson and Mr. Newman was inapplicable to the defendants charged in the I.B.M. insider trading case.

In deciding whether to appeal the ruling, Mr. Bharara has several options — two of which require the approval of the United States Solicitor General Donald B. Verrilli Jr. Those options are a direct appeal to the United States Supreme Court or a request for all of the judges in the Court of Appeals for the Second Circuit to reconsider the three-judge appellate panel’s ruling — in what is called an en banc proceeding.

But an appeal to the Supreme Court, a process known as a writ of certiorari, is seldom granted. The Supreme Court is reluctant to take on a case unless it raises a constitutional issue or there is an obvious split over the interpretation of the law between several appellate jurisdictions. Neither of those situations, however, existed in this case.

A full hearing before all of the judges of an appellate court also is a rare event, and such applications are often denied.

In light of that, former prosecutors and criminal defense lawyers said Mr. Bharara’s best course of action would be to ask the same three-judge panel to rehear the case to make some modifications in its ruling. To do that, Mr. Bharara does not need the approval of the solicitor general. Such rehearings are more commonly granted if the appellate panel believes it is necessary to clear up any confusion by its ruling.

A rehearing by an appellate panel rarely results in the final decision being overturned, but it sometimes leads to the panel making adjustments to a decision to clarify certain points in the ruling.

In a three-page order, Judge Carter said that the appellate ruling was now “the controlling rule of law” in the Second Circuit, which includes the federal courts in Manhattan. The judge said the guilty pleas needed to be vacated in light of the appellate court’s ruling on what constitutes the elements of insider trading, including the requirement that a recipients of inside information are aware that the tipper received some “personal benefit” for passing on the information.

Federal prosecutors have suggested both privately and publicly at legal conferences that this new definition of what constitutes
a benefit could result in some extreme and unwanted results. Prosecutors, for instance, have said this more constricted view of a benefit might make it difficult to file charges against a parent who passes on a confidential stock tip to one of his children without receiving anything in return.