UPDATE 1-SEC wins insider case against former Fidelity trader

* SEC wants Donovan to pay back $398,383.

* Donovan's lawyer plans to appeal

* Fidelity brought case to regulators' attention

(Adds details about case, comment from lawyer)

By Svea Herbst-Bayliss

BOSTON, Nov 24 (Reuters) - A federal jury in Boston has ruled against a former Fidelity Investments trader who illegally traded a stock the mutual fund giant was purchasing for itself.

The jury in U.S. District Court in Boston found that David Donovan engaged in insider trading in connection with Covad Communications Group Inc, the U.S. Securities and Exchange Commission said on Tuesday.

The case marks a major win for the SEC at a time the agency has been criticized for having failed to detect several Ponzi schemes and is working on bringing other insider trading cases.

The SEC said it wants Donovan, who worked at Fidelity from 1992 until 2005, to pay back the ill-gotten gains, interest and penalties, totaling $398,383.

Donovan's lawyer is expected to appeal.

"We are confident that given the evidentiary problems that arose during the trial, the SEC's claim of insider trading related to Mr. Donovan's mother will be overturned," Raipher Pellegrino said in a statement.

The jury found Donovan's co-defendant, David Hinkle, not liable for insider trading.

The trial, which lasted seven days, is one of a number of insider trading cases the SEC has brought in the last years.

"This verdict is a victory for investors and it demonstrates that we will continue to hold Wall Street insiders accountable for insider trading," said David Bergers, the SEC's regional director in Boston said.

Financial regulators charged Donovan obtained confidential information from Fidelity's internal order database that showed the mutual fund giant was buying a large amount of the California-based technology company's stock for Fidelity clients.

Between July and September 2003, Donovan, a stock trader at the Boston-based company accessed its internal database about 107 times, the SEC said.

Covad shares were then purchased for an account owned by Donovan's mother and by Hinkle, an Austin, Texas-based broker. Fidelity, which has a code of ethics for personal investing, denied Donovan's request to trade in the stock.

Donovan's mother profited after selling the Covad stock in early September 2003, after the price of the stock had risen. She was not charged. Her account had been inactive for two years until the Covad purchases. She was not accused of any wrongdoing.

Fidelity uncovered Donovan's actions during an internal investigation and brought it to regulators' attention, company spokeswoman Anne Crowley said. Fidelity forced Donovan to resign in 2005.

In similar cases, the SEC has often filed an administrative proceeding to prevent the person who was found liable of insider trading from working in the securities industry in the future. (Reporting by Svea Herbst-Bayliss; editing by Leslie Gevirtz and Andre Grenon) ((Svea.Herbst@Reuters.com +1 617 856 4331; Reuters Messaging: svea.herbst.reuters.com@reuters.net))