Prosecution's shift in insider trials could indicate a weak case

After highly publicized arrests in February, federal prosecutors are suddenly backpeddling in their insider trading case against three Wall Street executives. Whether it's a strategic retreat to a stronger position or a disorderly withdrawal remains unclear. The United States Attorney's office asked a federal judge earlier this week to dismiss the securities fraud indictments brought against arbitrageurs Robert M. Freeman of Goldman, Sachs & Co. and former Kidder, Peabody & Co. employees Richard B. Wigton and Timothy L. Tabor. At press time, the judge had yet to rule on the request.

The unusual move typically signals that prosecutors have insufficent evidence to make a case. It comes on the heels of an unsuccessful attempt to delay the trial by two months.

``It may be tactical move, but it suggests they don't have confidence in the narrow case alleged in the indictments,'' says Richard Phillips, a securities lawyer with Kirkpatrick & Lockhart, a law firm in Washington.

Federal prosecutors justified Wednesday's dismissal request, saying evidence now being uncovered in a grand jury investigation pointed to a wider conspiracy. The original four indictments are ``the tip of the iceberg,'' said assistant US attorney Neil Cartusciello. He said new charges would cover illicit trading in approximately nine companies, instead of just two: Unocal and Storer Communications.

But defense laywers say the government moved too quickly and is now trying to cover its tracks. They are expected to ask that the trial be dismissed ``with prejudice.'' If the judge dismisses the charges with prejudice, it would be at least a short-term blow to federal prosecutors. It means the government could not indict the three men on the same stock trading deals, say securities lawyers.

Prosecutors could rebound with a stronger case. They might not have taken this gambit unless they felt there were bigger charges to be brought.

``If you have 16 violations, it's very common in criminal prosecutions to narrow the case to just a few of the strongest violations,'' says Mr. Phillips.

The government could also be trying to delay the trial to protect the integrity of its current investigation. It may fear that Martin Siegel, who is reported to have implicated the three men, may be called to the witness stand before the grand jury investigation is complete. It also could be concerned that witnesses will be called while the investigation is under way.

The media-conscious US attorney, Rudolph Giuliani, has been criticized for bringing these problems down on his own office. Rather than slowly develop the case and waiting until it had all the pieces, Mr. Giuliani opted for well-publicized arrest at the offices Messrs. Freeman and Wigton and at Mr. Tabor's home.

The arrests started the clock ticking on the Speedy Trial Act, which guarantees the accused of a quick trial. It now appears those arrests were made before the investigation was complete.

``If Mr. Giuliani and his assistants had no evidence indicating these people would flee or their criminal acts would continue, it would seem to me the arrests were not justified,'' says Lee Richards, a securities lawyer with Grais & Richards in New York. ``It's bad tactics for the sake of dramatic impact. But we won't know that until the prosecutor shows us.''

The insider trading probe began a year ago with the arrest of investment banker Dennis Levine. He is serving a two-year prison term. Mr. Levine led to Ivan F. Boesky, who agreed in November to pay $100 million in fines for insider-trading violations and pleaded guilty to a criminal charge last month. Mr. Boesky implicated Mr. Siegel, former merger specialist at Kidder, whose cooperation led to the arrests of Freeman, Tabor, and Wigton.