Court Overturns Insider Trading Conviction : Wall Street: The Court of Appeals ruling involving a stockbroker narrows the definition of insider trading to exclude a long chain of tipsters.

In a key ruling on insider trading, an appeals court Wednesday overturned the conviction of a stockbroker who bought Waldbaum supermarket stock after learning about the company’s imminent sale from a Waldbaum family member.

The U.S. 2nd Circuit Court of Appeals said it could find no evidence that former Gruntal & Co. broker Robert Chestman knew the information about the 1986 sale of the supermarket chain was confidential.

The ruling narrows the definition of insider trading to exclude a lengthy chain of tipsters, which defense lawyers in the case had labeled “family gossip.”

Insider trading lacks a statutory definition but generally refers to buying or selling securities on the basis of confidential, nonpublic information.

The case had expanded securities law interpretation to encompass disclosure of secrets down a chain and hinged on whether Chestman had a fiduciary duty to Waldbaum Inc. No prior criminal case had involved confidential information passed among family members.

Chestman, who began serving his two-year prison sentence last June, was expected to be released from a minimum-security prison in Allenwood, Pa., almost immediately, Chestman attorney Alan J. Brudner said.

The U.S. Attorney’s Office was reviewing the ruling and had not decided on whether to appeal to the Supreme Court or for an appellate court rehearing, spokeswoman Deborah Corley said.

“It seems to confirm everything we’ve been saying about this case from the start,” attorney Brudner said. “A chain of family gossip is not what the securities laws were intended to address, at least not in this case.”

According to testimony at Chestman’s trial, Ira Waldbaum agreed in 1986 to sell the grocery business founded by his grandfather in 1921 to the Great Atlantic & Pacific Tea Co.--better known as A&P--for; $50 a share, or $28.7 million.

He told his sister, Shirley Witkin, about the deal, stressing that the information had to remain confidential until it was announced publicly. Witkin informed her daughter, Susan Loeb, who in turn told her husband, Keith.

Keith Loeb then told Chestman, who bought 11,000 shares of Waldbaum Inc. for about $25 each, making overnight profits of $250,000 for himself and several clients, including Loeb.

The Securities and Exchange Commission, alerted to the trading by routine post-merger stock market surveillance, filed civil charges. Loeb cooperated with investigators.

Chestman was charged criminally and convicted by a jury in May, 1989, on 31 counts. The civil charges are pending.

But the appeals court said in reversing the conviction: “It cannot be inferred that Chestman had constructive knowledge of the confidentiality of this information simply because he knew Loeb’s wife to be a member of the Waldbaum family.”

The judges also said they could find no evidence that members of the Waldbaum family had a history of trusting each other with business confidences.

Chestman’s conviction had hinged on whether Loeb had a duty to the Waldbaum company via the family and whether Chestman knew he was breaching it.

Loeb testified at the trial that he called Chestman, a senior vice president at Gruntal and his broker since 1982, on the morning of Wednesday, Nov. 26. “I told him that Waldbaum’s is about to be sold and it would be substantially higher than it was currently trading at,” he said.

Loeb did not cite his source or say the information was confidential.

Chestman’s attorneys said he had decided to serve the prison term before his appeal was decided because he felt he couldn’t get a job until the case was behind him.

Chestman, who was to be released to a halfway house in August and paroled in November, had not immediately been told of the decision, Brudner said.