IBM Insider-Trading Pleas Tossed on Appeals Court Ruling

The guilty pleas of four men who admitted to earning more than $1 million from an IBM acquisition were dismissed by a federal judge who cited a landmark U.S. appeals court ruling that makes it harder for prosecutors to prove insider trading.

U.S. District Judge Andrew Carter in Manhattan also took the unusual step of ordering prosecutors to appear in his courtroom Friday to explain their evidence. The case against a fifth man who pleaded not guilty was also put on hold after having been scheduled to go to trial in February.

The five accused contend a sweeping U.S. Court of Appeals ruling last month overturning insider-trading convictions of two fund managers, Todd Newman and Anthony Chiasson, means they should go free. Prosecutors argued that the appellate ruling doesn’t apply to the International Business Machines Corp. case.

The appeals court said that, to be found guilty, defendants must know their tips came from someone who not only had a duty to keep it secret but also got a benefit for leaking it.

The four men admitted to trading on inside information of IBM’s $1.2 billion acquisition of SPSS Inc. A lawyer working on the deal passed details to Trent Martin, a friend, not expecting him to tell others or trade on the information, the U.S said. Martin, however, told a roommate, who told three others, all stockbrokers, according to the U.S. The lawyer wasn’t charged.

Skeptical Judge

The judge Thursday said he was initially “skeptical” of the government’s argument that the IBM case was different but now is convinced the appeals court’s ruling applies.

The judge said prosecutors will have to lay out their case against the five men so he can determine whether there’s enough evidence to proceed to trial. At least four of the defendants have asked separately for the cases to be dismissed completely.

Prosecutors, in a Jan. 19 letter to Carter, called the appeals court’s ruling involving Newman and Chiasson “erroneous.” If the judge agrees with the defense lawyers’ interpretation of the ruling, they conceded that the four guilty pleas in the IBM cases should be vacated and pending charges against them and the fifth defendant dismissed.

The case is U.S. v. Conradt, 12-cr-00887, U.S. District Court, Southern District of New York (Manhattan).

Before it's here, it's on the Bloomberg Terminal.