UPDATE 2-U.S. prosecutor to drop insider trading charges over IBM deal

(Updates with details from court hearing)

By Nate Raymond

NEW YORK Jan 29 U.S. prosecutors said on Thursday they will drop charges against five men accused of insider trading ahead of an IBM Corp acquisition after an appellate court ruling limited the ability of authorities to pursue such cases.

At a court hearing, prosecutors in the office of U.S. Attorney Preet Bharara in Manhattan said they would submit paperwork by Feb. 4 to drop the charges after U.S. District Judge Andrew Carter rejected their unusual request to dismiss the indictments.

A dismissal by the judge would have allowed Bharara's office to appeal Carter's ruling last week that the December appellate court decision applied to the case. The decision resulted in the guilty pleas of four of the men being thrown out.

Andrew Bauer, a prosecutor, said that as a result of the heightened legal standard, "we do not have the requisite evidence to establish one of the elements of the crime."

Defense lawyers welcomed the decision. "We're all thrilled," said Catherine Redlich, a lawyer for former Euro Pacific Capital Inc trader Thomas Conradt.

Prosecutors said they reserved the right to refile charges later.

The case was the latest setback for prosecutors following a ruling by the 2nd U.S. Circuit Court of Appeals that reversed the insider trading convictions of hedge fund managers Todd Newman and Anthony Chiasson.

The appellate court held that prosecutors must prove a trader knew that the source of a tip received a benefit in exchange for the information. It also narrowed what constitutes a benefit, saying it cannot be only friendship.

Prosecutors last Friday asked the appellate court to reconsider the ruling, which has resulted in six of the 86 insider trading convictions secured by Bharara to be set aside.

In the IBM case, prosecutors said a lawyer at IBM's law firm in 2009 told Trent Martin, an analyst at Royal Bank of Scotland Group Plc, about IBM's planned $1.2 billion acquisition of SPSS Inc.

While the lawyer expected his friend, Martin, not to tell anyone, the analyst bought SPSS stock and told his roommate, Conradt, who in turn told Euro Pacific colleagues, traders David Weishaus, Daryl Payton and Benjamin Durant, authorities said.

Carter last week cited the 2nd Circuit ruling in tossing the guilty pleas of Martin, Conradt, Weishaus and Payton ahead of a Feb. 23 trial for Durant.

Prosecutors had argued the appellate ruling should not apply since the information was misappropriated from the lawyer.

The case is U.S. v. Conradt, U.S. District Court, Southern District of New York, No. 12-cr-00887. (Editing by Chizu Nomiyama and Jeffrey Benkoe)