NEW YORK, Feb 9 (Reuters) - An insider trading case against a former Wyoming Retirement System chief investment officer has become the latest prosecution to face a potential setback after a major appellate ruling limited the ability of authorities to secure convictions.
John Johnson, the former executive, had pleaded guilty in 2013 to trading on inside information about Foundry Networks Inc’s $3 billion takeover by Brocade Communications Systems Inc before it was announced.
But on Friday, U.S. District Judge Valerie Caproni in Manhattan ordered prosecutors to address whether Johnson’s guilty plea “remains sufficient” in light of the December appellate decision, raising the prospect she could throw it out.
The 2nd U.S. Circuit Court of Appeals in New York, in reversing the convictions of hedge fund managers Todd Newman and Anthony Chiasson, ruled that prosecutors must prove a trader knew that the source of a tip received a benefit in exchange for the information.
The court also narrowed what constitutes a benefit, saying it must be of “some consequence” and cannot be only friendship.
Prosecutors are seeking the reversal of the ruling, which has already prompted them to drop charges against five more of the 92 people charged by Bharara’s office since 2009.
Johnson, 48, had pleaded guilty to securities fraud and conspiracy charges. He later testified in the insider trading trial of David Riley, Foundry’s former chief information officer, who was convicted in October.
Prosecutors said Riley in 2008 told Matthew Teeple, then an analyst at hedge fund Artis Capital Management, about Brocade’s proposed acquisition of Foundry.
Riley told others about the merger, prosecutors said, including Johnson, who testified that, before taking the Wyoming pension system job, he traded in Foundry stock based on the tip.
Riley’s lawyers have sought to have the verdict tossed. They cite the 2nd Circuit ruling, arguing Johnson “likely pleaded guilty to something that was not a crime,” since he never acknowledged knowing Riley received anything for the tip.
A spokeswoman for Bharara declined to comment. But in court papers, prosecutors argued the appellate ruling did not impact Johnson’s guilt, as he suspected Teeple was providing his source information about other companies.
Johnson’s lawyer declined comment on Monday. Riley’s lawyer had no immediate comment.
The case is U.S. v. Johnson, U.S. District Court, Southern District of New York, No. 13-cr-190. (Reporting by Nate Raymond in New York; Editing by Richard Chang)