The action is extremely rare, as this mea culpa by the government comes after prosecutors had already won a conviction in the high-profile case.
"After careful review, I have concluded that certain information should have been provided to the defense for use at trial," Holder said in a statement. "In light of this conclusion, and in consideration of the totality of the circumstances of this particular case, I have determined that it is in the interest of justice to dismiss the indictment and not proceed with a new trial."
A federal jury in Washington convicted the then-lawmaker, 85, on corruption charges last October, just days before Stevens lost a reelection bid. The prosecution charged that Stevens lied on his Senate financial disclosure forms, in effect concealing $250,000 worth of gifts and home renovations from a wealthy oilman, Bill Allen, and his oil services company, Veco.
Stevens, who was appointed to the Senate in 1968 and elected in 1970, is the longest-serving Republican senator. He has been awaiting sentencing as his defense team appealed the verdict.
Defense lawyers had throughout the trial accused the prosecution of misconduct, including withholding evidence, and the judge presiding over the trial had repeatedly admonished the government team.
One of the key allegations is that prosecutors might have tried to make certain that a witness who would have been useful to the defense never testified. A whistleblower at the FBI supported the defense claim in a complaint filed in December.
And there have been other explosive allegations since the trial ended, including that the lead FBI agent on the case might have a had inappropriate relationship with Allen, the government's star witness, and that the agent was allegedly telling potential witnesses about grand jury information before trial.
Stevens: 'Cloud That Surrounded Me' Is Gone
During the trial, prosecutors fended off several requests for a mistrial filed by Stevens' attorneys. Lead prosecutor Brenda Morris admitted to some mistakes in court, and said that her team was "not taking this lightly."
Stevens attorneys Brendan Sullivan Jr. and Robert Cary released a statement saying they're "grateful" for Holder's decision, adding that the decision "is justified by the extraordinary evidence of government corruption in the prosecution" of the former lawmaker.
In a separate statement, Stevens said in part, "I always knew that there would be a day when the cloud that surrounded me would be removed. That day has finally come."
"It is unfortunate that an election was affected by proceedings now recognized as unfair," he added. "It was my great honor to serve the State of Alaska in the United States Senate for 40 years."
In their comments, defense attorneys also eviscerated the trial prosecutors' actions, claiming that the "jury verdict was obtained unlawfully" and that the "misconduct of government prosecutors, and one or more FBI agents, was stunning."
"This case is a sad story and a warning to everyone," the statement added. "Any citizen can be convicted if prosecutors are hell-bent on ignoring the Constitution and willing to present false evidence."
Sullivan and Cary did praise the trial judge, U.S. District Court Judge Emmet Sullivan, calling him a "hero" for using his "judicial scrutiny and instincts." They went on to call Holder a "pillar of integrity" and praised the "thousands of ethical prosecutors and FBI agents who have our admiration and respect for the work they do."
"The wrongdoing of a few should not taint the majority," they said in the statement.
Later Wednesday, Sullivan, who has rarely spoken to the media covering the Stevens case, repeated the statement to reporters gathered at the Williams & Connolly law firm offices in Washington, D.C.
In his statement, Stevens also expressed gratitude for the actions of the new prosecutors on the case and the judge and thanked his supporters.
Holder said that the Justice Department's Office of Professional Responsibility will "conduct a thorough review of the prosecution of this matter." The statement continued, noting that the department is reserving judgment on the prosecutors involved at this time. Holder leaves on an official visit to Mexico Wednesday afternoon.
Ted Stevens' Alaska Legacy
Justice Department lawyers filed a motion with the court Wednesday morning, stating that a new trial would be "in the interest of justice," but that "based on the totality of circumstances and in the interest of justice, it will not seek a new verdict and dismiss the indictment with prejudice," meaning that the charges could not be filed again.
In reviewing the case, new prosecutors found that at trial, government attorneys questioned witness Allen about a conversation regarding the bills for renovations to Stevens' Girdwood, Alaska home. Allen said he thought Stevens asked for the bills to "cover his a--," but the defense produced evidence that the senator asked Allen to bill him.
The billing issue was central to the case, as the government alleged Stevens tried to conceal the value of the renovations; the defense said Allen never billed the lawmaker for the work.
But Allen, who suffered brain injuries injuries in a 2001 motorcycle accident, did not recall having the conversation in an earlier interview with prosecutors. And the other alleged participant in the conversation testified that it didn't occur.
Though he lost re-election last year, Stevens' legacy in Alaska remains.
Stevens helped work on statehood for Alaska and had built a reputation as a Senator for his ability to secure millions in federal dollars to Alaska, including the infamous "bridge to nowhere" project. Buildings and facilities all across Alaska, including the state's biggest airport, bear Stevens' name.
But Stevens is also known for his orneriness. On days when he was spoiling for a fight in the Senate, he often wore a tie bearing the angry comic book hero the Incredible Hulk. He even referred to himself as "a mean, miserable SOB."
Judge Sullivan has scheduled a hearing for next Tuesday to formally discuss the government's motion to drop the case.