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US Attorney Dealt Major Defeat as Insider Trading Convictions Overturned

In a 28-page decision, the United States Court of Appeals for the Second Circuit in Manhattan overturned two of the government's signature convictions, the case against the former hedge fund traders Todd Newman and Anthony Chiasson, who were tried together. Citing the trial judge's "erroneous" instructions to jurors, the court not only reversed the convictions but threw out the case altogether.

The unanimous decision by a three-judge panel - the first higher court rebuke of an insider trading case filed by Preet Bharara, the United States attorney in Manhattan - offers a blueprint for lawyers to defend future insider trading cases. It could also portend a partial unraveling of Mr. Bharara's insider trading crackdown, a rare bright spot for the government as it came under attack for going soft on Wall Street after the financial crisis.

The appellate ruling hinged on a 30-year-old United States Supreme Court case, Dirks v. S.E.C., that has long been the cornerstone of insider trading law. Clarifying the vagaries of that ruling, the appellate decision drew a new and more defined line that curtails the boundaries of insider trading liability.

The case raised the bar for prosecutors on a crime that is already hard to prove, and will limit the types of cases the government can pursue. The Second Circuit Court of Appeals said prosecutors must prove traders knew that the person who provided an inside tip gained a tangible reward for doing so. The judges said it may be legal to trade on inside information, even if it gives an investor an unfair advantage in the markets, as long as the tipper didn't commit an illegal breach of duty.

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