The 2nd U.S. Circuit Court of Appeals in New York said prosecutors presented insufficient evidence to convict Todd Newman, a former portfolio manager at Diamondback Capital Management, and Anthony Chiasson, co-founder of Level Global Investors.

The court held that a trader or investor can only be convicted if he or she knows the original source of non-public information has received financial or other personal benefits of “some consequence” in exchange for the tip.

That establishes a tougher standard that could make future insider trading cases substantially harder to prove and pave the way for one of Bharara’s highest profile convictions involving a former manager at SAC Capital to be tossed out.

The ruling raises the bar for prosecuting individuals who are one or more layers removed from sources of confidential information, said Marc Powers, a securities lawyer with BakerHostetler, adding that prosecutors had been “pushing the boundaries” in many recent such cases.

“The 2nd circuit appears now to be setting the government straight,” he said in an email.

Newman and Chiasson had been sentenced to 4-1/2 years and 6-1/2 years in prison, respectively, and had been out on bail pending appeal.

The case had been closely watched among the white collar defense community for whether the court would impose a heightened standard for proof in insider trading cases.

It marked a blow for Bharara, whose office in a five-year insider trading crackdown had secured convictions of 82 other people, with one trial acquittal but no previous appellate reversals.

Bharara in a statement said he was considering an appeal of the ruling, which “will limit the ability to prosecute people who trade on leaked inside information.”

Bharara stressed the ruling would impact only a “subset of our recent cases.” Many cases had already been affirmed on appeal, involved different facts or defendants who pleaded guilty.

One defendant who may benefit from the ruling is Michael Steinberg, a SAC Capital portfolio manager convicted in December 2013 and later sentenced to 3-1/2 years in prison. He was indicted in the same conspiracy as Newman and Chiasson and has raised similar arguments on appeal.

“The 2nd Circuit’s decision clearly means that Michael Steinberg is innocent of any crime and his conviction will be vacated as well,” said Barry Berke, Steinberg’s lawyer.

Lawyers for Chiasson and Newman also praised the ruling.

“We are gratified that, going forward, others will benefit from clearer rules in this area,” Newman’s lawyers Stephen Fishbein and John Nathanson said in a joint statement.

‘ERRONEOUS’ JURY INSTRUCTION

Newman, 50, and Chiasson, 41, were found guilty in 2012 for their roles in a scheme the government said reaped $72 million in illicit profits after trading on inside information about computer maker Dell Inc and chipmaker Nvidia Corp .

Prosecutors said both men traded on tips they received from analysts working at their hedge funds who were members of a “corrupt circle” of investment firm analysts that traded non-public information obtained from employees at various companies.

At their trial, U.S. District Judge Richard Sullivan did not require proof that Newman and Chiasson knew insiders at Dell and Nvidia received something in exchange for the information they provided.

U.S. Circuit Judge Barrington Parker, writing for the three-judge appeals panel, on Wednesday called that instruction “erroneous,” describing many recent government insider trading cases as having involved individuals “many levels removed from corporate insiders” who may have tipped them off about deals or other non-public information.

While only courts in New York, Connecticut and Vermont are legally bound by the ruling, the 2nd Circuit is the first appeals court to address the issue and appeals courts across the country could look to the ruling for guidance.

Jill Fisch, a professor at the University of Pennsylvania School of Law, said the ruling was a message the recent insider trading prosecutions had gone too far.

While traders should not be allowed to pay a corporate insider for non-public information, she said, Wall Street traders routinely “get a whole lot of information from people that you talk to all the time.”

“What basis could you possibly have for determining which information you can use and which you can’t?” she said.

The ruling could also add pressure for the U.S. Securities and Exchange Commission to explain in greater detail which behaviors on Wall Street count as insider trading, said C. Evan Stewart, a partner at Cohen & Gresser in New York.

He said while the SEC does not write criminal laws, its rules provide the standard for which criminal fraud laws can be applied in insider trading cases.

U.S. officials have argued the rules are clear, but traders, including Steven A. Cohen, founder of the firm called SAC Capital until its recent rebranding, contend they are not.

“This is the 2nd Circuit saying there needs to be greater clarity about what the law is here,” Stewart said.