WASHINGTON/NEW YORK (Reuters) - The U.S. Supreme Court on Monday rejected a Justice Department bid to restore the insider trading convictions of two hedge fund managers in a move that a top federal prosecutor said may allow some executives who engage in such conduct to go unpunished.
In a blow to federal prosecutors, the justices left in place a December ruling by the 2nd U.S. Circuit Court of Appeals in New York that threw out the 2012 convictions of hedge fund managers Todd Newman and Anthony Chiasson for trading on inside information about Dell Inc [DI.UL] and Nvidia Corp (NVDA.O).
Prosecutors contend that the ruling too narrowly defined what constitutes insider trading and could impair the government's ability to bring charges against those who trade on non-public corporate information.
Manhattan U.S. Attorney Preet Bharara, whose office prosecuted Newman and Chiasson, said under the ruling he would have to think "long and hard" about whether he could prosecute a chief executive for tipping friends and family to make trades.
"We think there is a category of conduct that arguably will go unpunished going forward," Bharara said in conference call with reporters.
Lawyers for the hedge fund managers argued that prosecutors were seeking an overly inclusive definition of insider trading.
Gregory Morvillo, Chiasson's lawyer, said the Supreme Court's decision "rejected the government's efforts to rewrite well-settled insider trading law."
Newman's lawyers, Stephen Fishbein and John Nathanson, said in a joint statement the decision came only "after years of government over-reaching," adding they hoped the action "will help ensure that others avoid a similar fate."
The high court rejected the case without comment.
Prosecutors and the U.S. Securities and Exchange Commission had previously asked the 2nd Circuit to reconsider the ruling, only to be rebuffed in April.
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.
December's ruling reversing their convictions marked a major setback for a crackdown on insider trading on Wall Street underway since 2009 under Bharara, whose office brought charges against 96 people.
Prosecuting insider trading has been a top priority under Bharara, resulting in the conviction of Galleon Group hedge fund founder Raj Rajaratnam and a $1.8 billion settlement and guilty plea by the hedge fund SAC Capital Advisors LP.
But with the December ruling, Bharara was forced to drop charges against five insider trading defendants. Bharara said on Monday he expects a "small subset" of additional cases to be affected, though 90 percent of the convictions would survive.
In the ruling reversing the convictions of Newman and Chiasson, a three-judge panel held that prosecutors must prove that a trader knew a tip's source received something in exchange.
That 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 his petition to the Supreme Court, U.S. Solicitor General Donald Verrilli sought to overturn the 2nd Circuit's narrow definition of what amounts to an illegal benefit.
Verrilli said in the petition the appeals court decision would "hurt market participants, disadvantage scrupulous market analysts, and impair the government's ability to protect the fairness and integrity of the securities markets."
The high court's action could encourage other insider trading defendants to seek dismissal of charges against them.
Among those who could benefit from the ruling is Michael Steinberg, a portfolio manager at SAC Capital sentenced to 3-1/2 years in prison after his 2013 conviction for engaging in the same alleged conspiracy as Newman and Chiasson.
Barry Berke, his lawyer, said the Supreme Court's decision "will now require that Michael Steinberg's conviction be thrown out as well since it confirms he did not commit any crime."
The Supreme Court's action could renew calls for Congress to pass legislation clearly spelling out what constitutes insider trading, a crime that largely had been left to the court and U.S. regulators to define.
The SEC could also potentially adopt new regulations, something Chairwoman Mary Jo White in June said "merits close consideration."
"Anything that could bring further clarity, whether a Supreme Court decision or a statute, I think reasonable people would think that's not a bad thing," Bharara said.
The case is U.S. v. Newman, U.S. Supreme Court, No. 15-137.
Editing by Will Dunham