(Reuters) - U.S. prosecutors, already smarting from a appeals court ruling that weakens their ability to crack down on future insider trading, on Thursday faced widening fallout from the decision as some existing cases threatened to unravel.

Lawyers for some defendants hinted they might seek to withdraw guilty pleas, and a Manhattan federal judge questioned if four such pleas were affected.

The moves were the latest repercussions from the 2nd U.S. Circuit Court of Appeals finding that prosecutors presented insufficient evidence to convict Todd Newman, a former portfolio manager at Diamondback Capital Management, and Anthony Chiasson, co-founder of Level Global Investors.

Speaking at a conference, U.S. Securities and Exchange Commission Chair Mary Jo White said Thursday "there is no question it's a significant decision," adding her agency was reviewing the Wednesday ruling, which she called "overly narrow."

Some defendants who cooperated and pleaded guilty in the prosecution of Newman and Chiasson are now considering taking the extraordinary step of withdrawing their pleas, two lawyers said Thursday.

The three-judge panel not only found that prosecutors needed to prove a trader knew that the original source of non-public information has received a benefit in exchange for the tip, but also narrowed what actually constituted such a benefit.

In several such cases, the defendants were tipped based on information they received third- or fourth-hand, rather than straight from the source, which made it tougher to prove their awareness that source had obtained something tangible in return.

The ruling threatens to challenge a broad insider trading crackdown underway since 2009 under Manhattan U.S. Attorney Preet Bharara, whose office during his tenure has secured 82 other convictions.


While the pace of prosecutions had looked set to gradually slow from the breakneck pace of recent years, the appeals court's ruling could slam the brakes on authorities' efforts to pursue future cases.

Many on Wall Street say that despite Bharara's thrusts against the practice, trading on privileged information remains common amid the current M&A boom, with Merck & Co's acquisition of Cubist Pharmaceuticals Inc just the latest deal to have seen unusual options activity before being announced.

Among those threatening to withdraw plea deals is Danny Kuo, a former Whittier Trust Co analyst who pleaded guilty in 2012 and turned cooperator. Roland Riopelle, Kuo's lawyer, said in an interview he had calls into the U.S. Attorney’s Office. While he had not made a definite decision, the issue was "certainly worth studying."

"If there's no crime there, that's a good reason to withdraw your plea," he said.

Kuo was nearly sentenced to six months in prison in July by U.S. District Judge Richard Sullivan, whose ruling in the Newman and Chiasson case was subject to the appeal.

But Sullivan delayed sentencing, saying if the 2nd Circuit reversed him and required proof a tippee knew an insider received something for non-public information, he was "not sure, frankly, in the guilty plea there's a sufficient basis to conclude that Mr. Kuo had that knowledge."

The ruling may also benefit Michael Steinberg, a SAC Capital portfolio manager convicted in 2013 and later sentenced to 3-1/2 years in prison as part of the same conspiracy.

Steinberg had raised similar arguments on appeal as Newman and Chiasson, and his lawyer, Barry Berke, said Wednesday the ruling meant his conviction would be vacated as well.

Separately, U.S. District Judge Andrew Carter in Manhattan scheduled hearings for Dec. 18 to address whether the ruling affects the pleas of the four men, who admitted to engaging in a scheme to buy options and stock in software maker SPSS Inc prior to the announcement that IBM Corp was acquiring it.

The defendants include former Euro Pacific Capital Inc traders Daryl Payton, Thomas Conradt and David Weishaus as well as Trent Martin, a former analyst at Royal Bank of Scotland Group Plc.

The order came after prosecutors late Wednesday asked Carter to suspend a pretrial schedule for a Jan. 12 trial of the last remaining defendant in the case, saying the appellate ruling raised "potential legal issues" that could affect the trial.

Lawyers for the defendants in the IBM case did not immediately respond to requests for comment.


Beyond pending cases, the ruling could also affect pending investigations involving similar chains of tippees, said Glen Kopp, a former prosecutor at Bracewell & Giuliani.

That would especially be true, he said, if authorities were sitting on cases following oral arguments in the case in April, at which some judges voiced skepticism of the prosecution's interpretation of the law.

"Could it impact more cases? Absolutely," Kopp said.

As hedge fund managers and their lawyers digested Wednesday's news, many began speculation about how the decision might impact their industry in the weeks and months ahead, with one former prosecutor who didn't want to be identified saying he thought it could lead to firms seeking tips more aggressively.

“I think people will be conservative for a while to start,” he said, adding that after a while, traders would likely start to make on-the-spot decisions that fell into a riskier category. “I think people will feel freer to send their analysts out to get information and they’ll take more risks.”