Now, federal prosecutors in Manhattan are disclosing their strategy to reverse the ruling, or at least narrow it.
In a filing late Friday, the prosecutors mounted a two-pronged challenge to the appellate ruling. Preet Bharara, the United States attorney in Manhattan, is asking the same three-judge panel that issued the ruling to revisit its decision, which imposed the greatest limits on insider trading prosecutions in decades.
“The opinion breaks with Supreme Court and Second Circuit precedent, conflicts with the decisions of other circuits and threatens the effective enforcement of securities laws,” prosecutors said in a 25-page petition.
As an alternative, the spokesman said, Mr. Bharara’s filing will propose the legal equivalent of a do-over in a process known as en banc. The process would require every judge on the United States Court of Appeals for the Second Circuit to hear the case.
While both requests could be long shots — since 2012, the Second Circuit has held only one en banc hearing involving as many as 15 appellate judges — the prosecutors’ requests might lay the groundwork for an appeal to the United States Supreme Court. That route could fail as well, or even generate a worse outcome for the government, but it might also nudge the three-judge panel to voluntarily clarify aspects of its ruling.
For Mr. Bharara, the outcome is critical. His office has won more than 80 convictions from his campaign to root out insider trading on Wall Street.
And now, his decision to appeal will escalate a battle that will shape the boundaries of insider trading law for decades to come.
If successful, it could also curb the broader fallout from the three-judge panel’s decision to overturn the convictions of Todd Newman and Anthony Chiasson, the hedge fund managers who were tried together in 2012.
The panel ruled that the judge who presided over their trial set too low a bar for conviction when instructing jurors. Its decision not only dismissed the cases against Mr. Newman and Mr. Chiasson, it also threatened a number of Mr. Bharara’s other signature convictions.
The insider trading conviction of Michael Steinberg, a onetime rainmaker at SAC Capital Advisors, the once-mighty hedge fund that Mr. Bharara indicted in 2013, would most likely be overturned if the three-judge panel’s ruling goes unchallenged. The judge who presided over Mr. Steinberg’s trial and provided the jury instruction, Richard J. Sullivan, also handled Mr. Chiasson and Mr. Newman’s trial.
The ripple effect has spread to other cases — and other jurisdictions.
After the appellate ruling — written by Judge Barrington D. Parker, Judge Ralph K. Winter Jr. and Judge Peter W. Hall — a number of defendants convicted of insider trading in New York and elsewhere have sought to have the charges against them dismissed. For example, lawyers for some of the cooperating witnesses who pleaded guilty and testified against Mr. Newman, Mr. Chiasson and Mr. Steinberg have signaled they might consider reopening those guilty pleas if the appellate ruling stands.
And on Thursday, a federal judge threw out guilty pleas from four men charged with trading on inside information involving shares ofIBM. The judge, Andrew L. Carter Jr. of the Federal District Court in Manhattan, cited the appellate ruling in entering not guilty pleas. He is still deciding whether the charges in that case should be dismissed in light of the appellate ruling.
The developments fulfilled Mr. Bharara’s predictions at the time of the appellate ruling in December, when he warned of a chilling effect. The ruling, he said then, “interprets the securities laws in a way that will limit the ability to prosecute people who trade on leaked inside information.”
At the heart of the three-judge panel’s decision to overturn the convictions of Mr. Newman and Mr. Chiasson is a question of what the two traders knew about a leak of inside information. Rejecting Judge Sullivan’s instructions to the jury, the appellate panel ruled that Mr. Chiasson and Mr. Newman needed to know that insiders at technology companies were improperly leaking confidential information to hedge funds in exchange for some “personal benefit.”
In the case, the tips started with insiders at Dell and Nvidia and ricocheted around the country before reaching Mr. Newman and Mr. Chiasson. Those extra layers, the panel concluded, meant that Mr. Newman and Mr. Chiasson would not have known of any such benefit.
The panel then took its ruling a step further, challenging the very notion of what constitutes a benefit. It is this aspect of the ruling that has disturbed prosecutors the most.
In this case, prosecutors had argued that mere friendship, or even something as simple as career advice, was enough to prove that a Dell employee received a benefit from leaking inside information. But the appellate court rejected that standard as low, saying the government must also show that the tipper expected to receive something “of some consequence,” although it did not specify what that must be.
“The panels’ erroneous definition of the personal benefit requirement will dramatically limit the government’s ability to prosecute some of the most common culpable and market threatening forms of insider trading,” the petition said.
Federal prosecutors have suggested, both publicly at legal conferences and privately, that this new definition could produce some extreme and unwanted results. Prosecutors have said this more constricted view of a benefit might make it difficult to file charges against, say, a parent who passes on a confidential stock tip to one of his children without receiving anything in return. Others have invoked the classic case of the corporate chief executive whispering to a friend on the golf course about a coming acquisition.
A number of defense lawyers have dismissed the nightmare situations that prosecutors have raised.
But in Los Angeles, James V. Mazzo, the executive of a medical device company accused of providing inside information to the former professional baseball player Doug DeCinces, has asserted that the indictment against him should be dismissed given the appellate ruling. He contends the government has not shown that he received any direct personal benefit for purportedly tipping Mr. DeCinces about an impending corporate deal.
Mr. Bharara still has time to appeal the ruling to the United States Supreme Court, but to do so, he would need the approval of the United States solicitor general, Donald B. Verrilli Jr., who also signs off on requests for en banc proceedings. But such an appeal, a process known as a writ of certiorari, is seldom granted.
Former prosecutors and criminal defense lawyers had said before the filing that Mr. Bharara’s best course of action would be to ask the same three-judge appellate to rehear the case to modify its ruling. A rehearing by an appellate panel rarely results in the final decision being overturned but sometimes does lead the panel to make adjustments that clarify its ruling.
Other legal experts have called for Congress to intervene, noting that the act of insider trading is not explicitly prohibited in a federal statute. Instead, a patchwork of legal opinions and regulations constitute the law.
“The decision is a reasonable interpretation of bad law that yields a bad result,” said Erik Gordon, a professor of business at theUniversity of Michigan Ross School of Business. “Insider trading is a term that doesn’t even appear in securities law. The law of insider trading has been built and rebuilt on a rickety tower.”
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