U.S. asks Supreme Court to reverse major insider trading ruling

By Lawrence Hurley and Nate Raymond WASHINGTON/NEW YORK (Reuters) - The U.S. Justice Department asked the Supreme Court on Thursday to reverse a federal appellate court's insider trading ruling, calling it a "roadmap" for potential criminals that undermined efforts to ensure the "integrity of the securities markets." Solicitor General Donald Verrilli filed a petition seeking review of a December ruling by the 2nd U.S. Circuit Court of Appeals in New York that reversed the insider trading convictions of hedge fund managers Todd Newman and Anthony Chiasson. The ruling marked a major setback for an insider trading crackdown underway since 2009 under Manhattan U.S. Attorney Preet Bharara, whose office brought charges against 96 people. In the petition, Verrilli wrote that the appeals court decision will "hurt market participants, disadvantage scrupulous market analysts, and impair the government's ability to protect the fairness and integrity of the securities markets." Newman, a former Diamondback Capital Management portfolio manager, and Chiasson, co-founder of Level Global Investors, were convicted in 2012 and sentenced to 4-1/2 years and 6-1/2 years in prison, respectively, for engaging in a scheme involving tips about Dell Inc [DI.UL] and Nvidia Corp . In the Dec. 10 ruling reversing their convictions, a three-judge panel held that prosecutors must prove that a trader knew a tip's source received something in exchange. The court also narrowly defined what constituted a benefit to the tipper by saying it could not be just be a friendship but had to be of "some consequence." In the petition to the Supreme Court, Verrilli only sought to overturn the 2nd Circuit's definition of what amounts to an illegal benefit. Bharara's office and the U.S. Securities and Exchange Commission had previously asked the 2nd Circuit to reconsider the definition, only to be rebuffed in April. If left in place, Verrilli said the 2nd Circuit's ruling could mean that conduct long understood as prohibited would "elude criminal prosecution - creating an obvious roadmap for unscrupulous insiders and tippees." For the Justice Department, there are no guarantees the high court will take up the case. A Supreme Court ruling could also potentially backfire by adopting the 2nd Circuit's interpretation of insider trading. But Stephen Crimmins, a defense lawyer at Murphy & McGonigle not involved in the case, said the fact the appellate court's ruling was binding on courts in New York, the home of Wall Street, likely drove prosecutors to determine an appeal of the restrictive ruling was worth it. "Prosecutors and SEC will have a much tougher job proving their cases," Crimmins said. "It's easy to understand why Preet Bharara and the Justice Department would want ask the Supreme Court to review this." Newman's lawyer declined comment. Gregory Morvillo, a lawyer for Chiasson, said his client "remains confident that the carefully reasoned analysis of the 2nd Circuit is well grounded in the facts and the law and will withstand Supreme Court review." 'UNPRECEDENTED AND ERRONEOUS' For Bharara, the appeal could help shape his legacy. Insider trading became a top priority under his watch, resulting in the conviction of Galleon Group hedge fund founder Raj Rajaratnam and a $1.8 billion settlement and guilty plea by SAC Capital Advisors LP. Katherine Goldstein, head of Bharara's securities and commodities fraud unit, said on Thursday the office was "really gratified" the solicitor general agreed the 2nd Circuit's ruling was "unprecedented and erroneous." John Nester, an SEC spokesman, said the 2nd Circuit's ruling "cannot be reconciled with controlling Supreme Court precedent." Until now, it has been left to the courts and U.S. regulators to define what constitutes insider trading. But in the wake of the 2nd Circuit ruling, and widespread confusion over the evidence needed to establish that a tipper received an impermissible benefit, several bills are now pending in Congress to spell out the exact nature of the crime. U.S. District Judge Jed Rakoff in Manhattan, who has written several rulings interpreting the 2nd Circuit ruling, said Thursday that he would welcome a move by Congress to pass an insider trading law. "It would avoid all the controversy that now exists," he said. (Reporting by Lawrence Hurley and Nate Raymond; Editing by Doina Chiacu and Tom Brown)