Fred Schiff, a former Bristol-Myers Squibb chief financial officer, won a federal appeals court ruling that limits the criminal fraud case brought against him by the U.S. Justice Department to whether he made misstatements on investor conference calls, Reuters reports.

So prosecutors are barred from introducing evidence that he failed to tell investors about an alleged improper practice known as channel stuffing to bolster revenue by giving financial incentives to wholesalers, or to explain an April 2002 plunge in the drugmaker’s stock price after the scheme became known. A spokeswoman for US Attorney Paul Fishman says options are being considered (UPDATE: here’s the ruling and some background).

“We have felt from the beginning that this prosecution was misguided and the case should never have been brought,” Schiff’s lawyer, Dave Zornow of Skadden Arps, tells Reuters. “The case still can go to trial, but on a narrow basis. All that’s left now are allegations of affirmative misrepresentation on a handful of analyst calls in 2001 and 2002 on the issue of wholesale inventory.”

Prosecutors had charged Schiff, 62, failed to tell investors that Bristol in 2000 and 2001 gave wholesalers tens of millions of dollars of incentives each quarter to spur them to buy more products they needed. The practice allowed the drugmaker to exaggerate revenue by $2 billion and meet its earnings targets, helping to inflate its stock price, they charged.

Bristol’s market value dropped several billion dollars after the practice came to light. In 2005, the drugmaker accepted a two-year probation from the Justice Department in a so-called deferred prosecution agreement, to avoid a possible trial. A US District Judge ruled in 2008 that prosecutors couldn’t introduce expert testimony about the stock price decline as evidence that Schiff’s alleged misstatements and omissions were material, and they couldn’t argue that Schiff made material omissions in Securities and Exchange Commission filings.

The appeals panel agreed. “The government has engaged in a game of musical chairs with their pursuit of changing legal theories” alleging securities fraud, U.S. Circuit Judge Thomas Ambro wrote for the panel. In the end the government’s case “reaches too far,” he said.

Another defendant in the proceedings, former Bristol worldwide medicines president Richard Lane, has had his case separated from Schiff’s. Bristol’s 2005 deferred prosecution agreement was arranged by then-U.S. Attorney Christopher Christie, who is now New Jersey’s governor.