New York Times

The Supreme Court on Monday refused to review an appeals court decision that made it harder to prosecute insider trading and threatens to undermine a number of convictions.

The decision is a blow to Preet Bharara, the United States attorney in Manhattan, whose office oversaw a sweeping crackdown on insider trading in the $3 trillion hedge fund industry.

In a conference call with reporters, Mr. Bharara said the ruling would make it more difficult for prosecutors to bring criminal cases when corporate executives pass on an inside tip to a friend or a relative expecting nothing special in return.

“We think there is a category of conduct that will go unpunished going forward,” he said.

As is their custom, the justices gave no reasons for turning down the case, which had been closely watched, given how seldom the high court has weighed in on the subject of insider trading.

The court’s determination to leave standing a ruling that some see as constraining prosecutors may put added pressure on Congress to step in and better define what constitutes the contours of trading on illegal inside information.

Monday’s decision was a final vindication for Todd Newman and Anthony Chiasson, two former hedge fund managers who were prosecuted by Mr. Bharara’s office and convicted in December 2012. Last year, a three-judge panel of the United States Court of Appeals for the Second Circuitoverturned their convictions.

The Justice Department had sought a review of that ruling, arguing that it represented a significant change in decades of insider trading case law.

The Supreme Court’s action could now jeopardize a number of other insider trading convictions secured by Mr. Bharara’s office, including one against Michael Steinberg, a former trader who worked for Steven A. Cohen, the billionaire investor. It could also affect a handful of plea agreements made with cooperating witnesses who aided the investigation.

Lawyers for Mr. Chiasson and Mr. Newman issued statements applauding the Supreme Court’s decision. A lawyer for Mr. Steinberg said the court’s decision should require that his client’s “conviction be thrown out as well.”

Mr. Steinberg, convicted of insider trading in 2013 while working at Mr. Cohen’s former hedge fund, SAC Capital Advisors, has an appeal pending.

Mr. Bharara declined to comment on how his office would respond to Mr. Steinberg’s appeal and any attempt by cooperators to overturn their pleas.

He noted, however, that 90 percent of his office’s insider trading convictions would be left standing, including one against Raj Rajaratnam, the former Galleon Group hedge fund founder, who is currently serving an 11-year prison sentence.

The case at the Supreme Court concerned trading at two hedge funds that was said to be based on inside information about coming earnings announcements at two technology companies. The defendants, Mr. Newman and Mr. Chiasson, learned the information indirectly and said they did not know enough about the original tips to be held criminally responsible for trading on them.

Mr. Newman, a former portfolio manager at Diamondback Capital Management, and Mr. Chiasson, a co-founder of Level Global Investors, were convicted in 2012. Mr. Newman was sentenced to 54 months in prison, and Mr. Chiasson to 78 months.

In overturning their convictions, the panel of the Second Circuit ruled that the original tips were not unlawful because the company insiders had not disclosed confidential information in exchange for a personal benefit. That ruling was based on a 1983 Supreme Court decision, Dirks v. Securities and Exchange Commission, which requires evidence that the insider “directly or indirectly” gained something from the initial disclosure.

The appeals court interpreted that requirement narrowly, saying it required “proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential and represents at least a potential gain of a pecuniary or similarly valuable nature.”

The court added that prosecutors must also prove that the defendants — in this case, several steps removed from the initial disclosure — knew they were trading on information of this sort. It said there was insufficient evidence on this second point.

The government asked the Supreme Court to review only the appeals court’s ruling on the kind of proof required to establish the insider’s personal benefit. It should be enough, the government said, to show that the insider had freely given “a gift of information to a trading friend or relative without receiving money or valuables as a result.”

The government did not challenge the second ruling, on what the defendants had to know. The defendants said that was reason enough to turn away the appeal, as nothing the Supreme Court said would change the outcome in their cases.

The Supreme Court’s decision to let stand the appellate ruling in New York does not preclude federal judges in other parts of the country from following the more liberal definition of personal benefit favored by prosecutors.

Jonathan Streeter, a lawyer with Dechert in New York and one of the prosecutors who tried Mr. Rajaratnam, said the status quo could create a problem, given that New York is the place where many insider trading prosecutions are brought.

Mr. Streeter said he would not be surprised if the S.E.C. and Justice Department now “seek legislation clearing up the law of insider trading.”

In a statement, Mr. Newman’s legal team at Shearman & Sterling lamented that the victory for their client came only “after years of government overreaching.” Gregory Morvillo, a lawyer for Mr. Chiasson, said his client was glad the Supreme Court “rejected the government’s efforts to rewrite” insider trading law.

The appeals court ruling is likely to have a direct impact on the conviction of Mr. Steinberg because he was charged with trading on some of the same stocks tips as Mr. Chiasson and Mr. Newman.

Lawyers have said several cooperating witnesses against the three men may be able to seek to overturn their own guilty pleas.

The Supreme Court decision could also have a bearing on another, much anticipated legal matter: the Securities and Exchange Commission’s administrative failure to supervise case against Mr. Cohen.

An S.E.C. administrative judge, at the request of Mr. Bharara, had delayed the action while the Supreme Court considered reviewing the case against Mr. Newman and Mr. Chiasson.

Mr. Steinberg is one of two former SAC portfolio managers whom Mr. Cohen is charged civilly with failing to supervise. The other, Mathew Martoma, was convicted of insider trading in one of the biggest dollar cases brought by federal prosecutors. Mr. Martoma is also appealing his conviction, but legal experts have said that it is not likely to be affected by the decision in the case against Mr. Chiasson and Mr. Newman.

A spokesman for Mr. Cohen, who now manages an $11 billion family office called Point72 Asset Management, declined to comment.

Mr. Cohen established the family office to manage his personal fortune around the same time a federal judge accepted his former hedge fund’s guilty plea to violating federal securities laws.