A court ruling that sharply curtailed the ability of prosecutors including Manhattan U.S. Attorney Preet Bharara to pursue insider trading cases is increasingly testing regulators' abilities across the country.

Defendants in California and Massachusetts have sought to take advantage of a December ruling from the 2nd U.S. Circuit Court of Appeals in New York that narrowed the definition of insider trading, making it harder for prosecutors to pursue their cases.

The challenges raise the possibility that the 2nd Circuit decision, legally binding only in New York, Connecticut and Vermont, could be adopted by other jurisdictions nationally or could create a split among the federal courts.

The ruling reversed the convictions of Todd Newman, a former portfolio manager at Diamondback Capital Management, and Anthony Chiasson, co-founder of Level Global Investors.

A three-judge panel held that prosecutors need to prove a trader knew the original source of a tip received a benefit in exchange for the information. It also narrowed what constitutes a benefit, saying it must be of "some consequence" and cannot be only friendship.

Samuel Lieberman, a defense lawyer involved in a similar challenge, said judges across the country often look to the 2nd Circuit for guidance.  

"The 2nd Circuit is the leading appeals court for insider trading," he said. "So disregarding it comes with some peril."

While the pace of prosecutions had looked set to slow from the pace of recent years, the appeals court's ruling could slam the brakes on authorities' efforts to pursue future cases. The decision's effect was quickly felt in New York, where Bharara's office on Friday filed papers asking the court to reconsider the ruling.

Bharara's office has charged 92 people with insider trading since October 2009 and had won guilty pleas or trial convictions of 86 of them, including Galleon Group hedge fund founder Raj Rajaratnam and former SAC Capital Advisors trader Mathew Martoma, before the 2nd Circuit ruling.

Many of those cases are unlikely to be affected by the ruling, because the benefits were financial and known to the traders. But some defendants have already sought to vacate guilty pleas and reverse trial convictions in light of it.

In the first decision to follow the 2nd Circuit ruling, a federal judge in Manhattan on Thursday threw out the guilty pleas of four men accused of illegally dealing in shares ahead of an IBM Corp acquisition.

A spokeswoman for Bharara declined comment, but in court papers Friday, his office argued the 2nd Circuit ruling "threatens the effective enforcement of the securities laws."

RIPPLE EFFECTS

The ruling is having ripple effects beyond New York. U.S. Securities and Exchange Commission data shows that 52 of the 66 people charged with insider trading civilly or criminally in the 2014 fiscal year were pursued outside of New York.

In Boston, for example, authorities charged a group of friends who they said exchanged non-public information about American Superconductor Corp.

One of the men, Eric McPhail, learned secret information about the company from one of its senior executives, who belonged to a country club where McPhail was a member.

Despite being told the information in confidence, McPhail tipped off other golfing buddies, including attorney Douglas Parigian, who reaped $300,000 in illegal profits, authorities say.

McPhail and Parigian were indicted in July, after earlier being sued by the SEC, which reached settlements with four of the friends for $145,309.

Both men have moved to dismiss the SEC's case and plan to do the same in the criminal case in light of the 2nd Circuit ruling, said Allison Koury, Parigian's lawyer.

In court papers, they argue no allegations exist that the executive received what would constitute a benefit under the 2nd Circuit's decision, and that authorities failed to allege Parigian knew about the benefit.

The U.S. Attorney's Office in Boston did not respond to requests for comment. But the SEC has argued since the information was misappropriated, it has to prove a benefit flowed to McPhail, who acted as the tipper.

The SEC said McPhail had made it clear he "was looking forward to getting paid back." Prosecutors on Wednesday meanwhile filed a superseding indictment that added a line saying he received a benefit from Parigian and others.

In Santa Ana, California, former Advanced Medical Optics Inc CEO James Mazzo and three co-defendants charged with insider trading filed papers arguing prosecutors failed to establish there was a tangible quid pro quo for allegedly tipping ex-Baltimore Orioles third baseman Douglas DeCinces about a deal.

Prosecutors say Mazzo, a close friend of DeCinces, tipped him in advance of Abbott Laboratories' $1.36 billion acquisition of the company, enabling him to make $1.3 million in illicit profits.

DeCinces, in turn, told five other people about the deal, including his business partner David Parker and real estate lawyer Fred Jackson, who made $347,920 and $140,259 respectively trading ahead of the deal, prosecutors say.

In court papers, prosecutors said the 2nd Circuit ruling is "inconsistent" with the law of the U.S. Supreme Court and the 9th U.S. Circuit Court of Appeals, which covers California and other Western states. They argue that insider trading includes making a "gift" of confidential information to a relative or friend.

Before the 2nd Circuit ruling, U.S. District Judge Andrew Guilford in Santa Ana previously denied a motion to dismiss by DeCinces that made similar arguments. Late on Friday, he denied the defendants' latest motions, saying with little explanation that he was upholding his earlier decision.    Lawyers for the defendants either declined comment or did not respond to requests for comment on Sunday.

But at a Jan. 12 hearing, Guilford warned prosecutors that if he did not dismiss the indictment, they needed to be prepared to "pursue their strongest claims," since the issue could still affect the case at the Feb. 3 trial or in any appeal.