Bristol-Myers ex-CFO wins ruling in criminal case

* Court says case against ex-CFO Schiff properly narrowed

* Defense pleased with ruling

* U.S. Attorney reviewing options

NEW YORK, April 7 (Reuters) - A former Bristol-Myers Squibb Co BMY.N chief financial officer won a federal appeals court ruling on Wednesday narrowing the criminal fraud case brought against him by the U.S. Justice Department.

A unanimous three-judge panel of the U.S. Court of Appeals in Philadelphia agreed upheld a lower court ruling that the case against Frederick Schiff should be limited to whether he made misstatements on investor conference calls.

It barred prosecutors from introducing evidence that Schiff failed to tell investors about an alleged improper practice to bolster revenue by giving financial incentives to wholesalers, or to explain an April 2002 plunge in the New York-based company’s stock price after the scheme became known.

David Zornow, who represents Schiff and leads the white-collar crime practice at Skadden, Arps, Slate, Meagher & Flom LLP in New York, was pleased.

“We have felt from the beginning that this prosecution was misguided and the case should never have been brought,” he said. “The case still can go to trial, but on a narrow basis. All that’s left now are allegations of affirmative misrepresentation on a handful of analyst calls in 2001 and 2002 on the issue of wholesale inventory.”

Rebekah Carmichael, a spokeswoman for U.S. Attorney Paul Fishman in New Jersey, said, “We are reviewing the opinion and considering our options.”

Prosecutors had charged Schiff, now 62, failed to tell investors that Bristol in 2000 and 2001 gave wholesalers tens of millions of dollars of incentives each quarter to spur them to buy more products they needed.

The practice, known as channel stuffing, allowed the drugmaker to exaggerate revenue by $2 billion and meet its earnings targets, helping to inflate its stock price, they said.

Bristol’s market value dropped several billion dollars after the practice came to light. In 2005, the company accepted a two-year probation from the Justice Department in a so-called deferred prosecution agreement, to avoid a possible trial.

U.S. District Judge Faith Hochberg in Newark, New Jersey ruled in 2008 that prosecutors could not introduce expert testimony about the stock price decline as evidence that Schiff’s alleged misstatements and omissions were material.

She also said prosecutors could not argue that Schiff made material omissions in U.S. Securities and Exchange Commission filings.

The appeals panel agreed.

“The government has engaged in a game of musical chairs with their pursuit of changing legal theories” alleging securities fraud, U.S. Circuit Judge Thomas Ambro wrote for the panel. In the end the government’s case “reaches too far,” he said.

Schiff, a Manhattan resident, has not worked since his 2005 indictment, Zornow said.

Another defendant in the proceedings, former Bristol worldwide medicines president Richard Lane, has had his case separated from Schiff’s.

Bristol’s 2005 deferred prosecution agreement was arranged by then-U.S. Attorney Christopher Christie, who is now New Jersey’s governor.

The case is U.S. v. Schiff, U.S. Court of Appeals for the 3rd Circuit, Nos. 08-1903 and 08-1909. (Reporting by Jonathan Stempel, editing by Leslie Gevirtz)