(Adds background on case, details of ruling, lawyer comment)
By Nate Raymond
NEW YORK, Jan 22 (Reuters) - A U.S. judge on Thursday threw out the guilty pleas of four men accused of illegally dealing in shares ahead of an IBM Corp acquisition, the first decision in response to a landmark appellate ruling curtailing prosecutors' ability to bring certain insider trading cases.
The decision raises the prospect that U.S. District Judge Andrew Carter in Manhattan could dismiss the indictment against the four men and a fifth defendant before a trial next month.
The 2nd U.S. Circuit Court of Appeals in December held that prosecutors need to prove a trader knew that the original 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.
In the IBM case, prosecutors said a worker at IBM's law firm told former Royal Bank of Scotland Group Plc analyst Trent Martin in 2009 that the company planned to acquire SPSS Inc for $1.2 billion.
While the friend expected Martin not to tell anyone, the RBS analyst bought SPSS stock and told his roommate, then Euro Pacific Capital Inc trader Thomas Conradt, who in turn told his colleagues, traders David Weishaus, Daryl Payton and Benjamin Durant, authorities said.
Carter said the December ruling that reversed the insider trading convictions of hedge fund managers Todd Newman and Anthony Chiasson deserved "utmost consideration" and applied to the case before him. He tossed out the guilty pleas of Martin, Conradt, Weishaus and Payton. Durant was scheduled to go on trial on Feb. 23.
Prosecutors said that because the information in the IBM case was misappropriated from the insider and not provided directly, the Newman decision did not apply. But Carter said it "applies equally in misappropriation cases."
Prosecutors had in a Jan. 19 letter said Carter should dismiss the indictment against all five men if he applied the 2nd Circuit decision. A hearing is scheduled for Friday.
Payton's lawyer, James Roth, said he is confident that a dismissal is "mandated."
Carter's ruling is another setback for Manhattan U.S. Attorney Preet Bharara, whose office had since October 2009 secured 86 convictions and guilty pleas for insider trading before the appeals court decision.
A spokeswoman for Bharara declined comment.
The case is U.S. v. Conradt, U.S. District Court, Southern District of New York, No. 12-cr-00887. (Reporting by Nate Raymond in New York; Editing by Grant McCool)