Round III of U.S. v. Frank Quattrone got under way yesterday with federal appeals judges sharply questioning the legality of the superstar investment banker’s May 2004 conviction on obstruction of justice charges.

The judges, led by Richard Wesley, wondered whether the evidence against Quattrone was sufficient to convict, whether the law had been properly explained to the jury, and whether the trial judge had gone too far in permitting irrelevant evidence that impugned Quattrone’s credibility.

While no one in the defense camp would predict victory, the judges’ questions suggested they were uneasy about the conviction and would likely overturn it. Whatever happens, the case will test the ability of federal prosecutors to win obstruction of justice convictions in the wake of the Supreme Court’s recent Arthur Andersen decision, especially in white-collar criminal prosecutions.

At one point in yesterday’s argument, Judge Wesley said that the federal prosecutor who tried the case against Quattrone did more than just push the envelope. “You blew the side of the envelope out, didn’t you?” Judge Wesley asked.

Other questioning was more even-tempered, but the appeals judges did press prosecutors to defend their conviction, and allowed Mark Pomerantz, the lead lawyer representing Quattrone, to take his pick of which of U.S. District Court Judge Richard Owen’s trial rulings he wished most to attack.

Quattrone was convicted of three counts of obstruction of justice 14 months ago. He was sentenced to 18 months in prison after Judge Owen granted the government’s motion to enhance Quattrone’s sentence based on what the judge ruled was his “knowing perjury at trial.”

In both trials, the Justice Department charged that Mr. Quattrone, the most prominent investment banker of the late 1990s technology boom, undermined federal investigations when on December 5, 2000, he sent a 22-word email to hundreds of Credit Suisse First Boston bankers in which he endorsed one colleague’s suggestion that the bankers “clean out” their files. Days earlier, a top CSFB lawyer had told Quattrone that a federal grand jury had issued a subpoena as part of an investigation of the bank’s process for allocating IPO shares.

The main issue at the trial and on the appeal is what was Quattrone thinking when he hit ‘send.’ Mr. Pomerantz called the case against his client so close that “any [legal] error likely contributed to the guilty verdict” and argued that there was insufficient evidence of Quattrone’s intent to sustain the conviction.

The appeals judges focused on what Quattrone would have to know to be guilty of obstruction of justice. There was no question that a CSFB lawyer had informed Quattrone about a federal grand jury investigation and that he characterized it as a serious matter. But there was also no question that Quattrone had never seen a copy of the subpoena and no one told him what documents the grand jury had requested.

David Anders, the assistant U.S. attorney who argued the case at the trial and on appeal, insisted that the jury must have concluded that Quattrone’s intent was corrupt. But Mr. Anders struggled to list the evidence that would prove that charge.

“Knowing about the grand jury doesn’t tell you what documents [were listed in the subpoena], does it?” demanded Judge Frederick Scullin.

Mr. Anders insisted that prosecutors could not be expected to prove that defendants knew the details of a subpoena. But he conceded that the law was “not a model of clarity.”

Just where to draw the knowledge line for future cases seemed to worry the judges.

But they seemed to have less doubt that some of Judge Owen’s trial rulings were hard to defend. Just after he sent the e-mail that led to his indictment, Quattrone sent another asking about whether CSFB would be able to collect $2 million due the bank for underwriting an IPO for a Canadian technology company called Research In Motion.

Quattrone’s lawyers used the e-mail to show that Quattrone was busy with many matters when he sent his e-mail almost absent-mindedly at the end of a busy day. But prosecutors questioned Quattrone at length about RIM and suggested that the fee he was collecting was improper, even illegal.