So does Martha Stewart now get her five months in Alderson Prison Camp, five months of electronic monitoring, five years of supervised probation, two years of court trials, $225,000 in fines and her reputation restored?

While finally dismissed by the trial court as prosecutorial overreach, Stewart’s original crime was “insider trading” upon which ruthless prosecutors added amorphous “conspiracy” and “lying” charges to convince the jury she must have done something wrong. Now in a dramatic decision the Second U.S. Circuit Court of Appeals in New York that oversees Wall Street has drastically reduced the range of actions that prosecutors can call “insider trading.”

Why does this matter when it concerns the rich and famous? Even my right-leaning friends have questioned my interest. They understand how unnatural it is for the law to expect someone who hears that a stock he owns will decline in value to not sell it, or buy it when the news is good—or then be subject to jail for 20 years for doing what any rational person would do. But who cares about these rich guys in New York who the data show mostly financially supported Barack Obama anyway? As a matter of fact, a majority of Americans—54 percent today and 65 percent before the recession—say they have money invested in stocks and are thus potentially subject to the same prosecutorial abuse.

Of course prosecutors like the U.S. Attorney in New York Preet Bharara, who a Time magazine cover story called the man “busting Wall Street,” seek out celebrities to assure prime media attention; but ordinary folks walk into the trap too. There have been 81 convictions and plea settlements on insider trading (and of course conspiracy) in the past five years. Securities and Exchange Commission agents recently even leaked to the press that popular golfer Phil Mickelson was being investigated for insider trading. Plea agreements are aimed at lower-level associates, threatening longer jail time unless they testify against the big fish. It works: President Obama was believed to have Bharara second on his list for Attorney General.

The new court decision concerned two portfolio managers, Anthony Chaisson and Todd Newman, who were accused by Bharara of using confidential information in an insider trading scheme to amass a $72 million profit by trading technology stocks Dell Inc. and Nvidia Corp in 2012. Yet, Chaisson and Newman’s information came through a network of investor relations representatives and analysts until it finally reached one of their employees. Trial U.S. District Judge Richard Sullivan instructed the jury that the two investors should be convicted if jurors believed there was a breach of trust that led to the release of the information—but he did not instruct them that the original leaker must have done so for personal benefit.

In overruling Sullivan, Judge Barrington Parker for a unanimous court noted that the traders were “three and four levels removed from the inside trader” and concluded: “even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chaisson knew that they were trading on information obtained by insiders in violation of those insiders’ fiduciary duties.” He noted that criminal intent was required and that Bharara and Sullivan ignored two Supreme Court decisions reflecting its necessity. Bharara had alerted the media he would re-indict the traders if he lost but the appeal judges dismissed the case “with prejudice” to make re-indictment unlikely. In the initial appeals hearing, Judge Ralph Winter pointedly noted the “sheer coincidence that the judge who bought into the government’s theory” was the same judge assigned to other recent insider trading trials and asked whether prosecutors were “abating” courthouse rules that bar them from steering cases to judges they believe are sympathetic to their views.

Unfortunately, Chaisson and Newman were not Bharara’s only target. Celebrity trader Raj Rajaratnam did trade on information he knew was leaked by a corporate fiduciary but Bharara could not resist expanding the case to his younger brother Renjan who was later acquitted by a New York jury. The founding partner of Wynnefield capital Nelson Obus was acquitted as well, although it cost him 12 years and $12 million in legal expenses. The recent decision will re-open other celebrity victim cases such as SAC Capital’s Steven Cohen and Michael Steinberg. Many of the prosecutions that were settled for testimony against higher-ups—such as several manipulated by prosecutors against Newman and Chaisson—will find it very difficult to prevail in appeals.

The good news is that the appeals court decision will undoubtedly restrain future prosecutorial abuses. Success at the Supreme Court is probable. In discussing a recent case concerning Security and Exchange Commission interpretation of insider trading, Justice Antonin Scalia said he hoped to find an appeal that would not bind courts to “the prosecutor’s interpretation” of criminal law since “the rule of lenity requires interpreters to resolve ambiguity in criminal law in in favor of defendants.” If such a case “comes before us I will be receptive to it.”

Law is most dangerous when it is ambiguous and leaves discretion to ambitious executives who do not consider wider implications. As Judge Parker said at the trial, “We sit in the financial capital of the world and the amorphous theory you [prosecutors] have presented gives precious little guidance to all these financial institutions and all these hedge funds out there about a bright-line theory as to what they can and cannot do.”

Parker is merely asking for a return to the traditional Western understanding of the rule of law. As philosopher John Locke, in his foundational Second Treatise on Government insisted, a valid rule of law must be “established, settled, known law received and allowed by common sense to be the standard of right and wrong and the common measure to decide all controversies between them.” Commonwealths must govern by “established laws, not to be varied in particular cases but to have one rule for rich and poor, the favorite at court and the countryman at plow.” Economic Nobel Laureate F.A. Hayek makes the same point in his authoritative Constitution of Liberty but adds that all economic prosperity rests on such law.

It has long been this author’s belief, as expressed in his recent book for example, that the decline in the rule of law—its ambiguity, its unreasonableness, and its sheer volume—is a major reason why the present recovery has been so tepid. Any sane financier or executive must be hesitant to act in the face of such “little guidance” in how to avoid possible prosecution and ruin. This fear has enormous practical effects in suppressing entrepreneurship and the risk-taking that produces enough wealth and jobs to produce a sustained recovery.

Just consider the travail of Mr. Chaisson’s firm alone. As noted by the Wall Street Journal, the company he co-founded, Level Global, was raided by Bharara, the FBI, and SEC in November 2010, melodramatically seizing documents, data, and computers, all witnessed by the media who naturally were alerted by Mr. Bharara. Two months later Chaisson’s co-founder David Ganek, who was never implicated in the former’s technology trades, shuttered the $4 billion fund, dismissing 80 employees due to the “cloud of uncertainty” following the raid. How many other Level Globals, banks, and firms remained in business but learned the lesson that it is smarter to play safe rather than speculate in businesses that produce jobs and wealth?

This problem is not unique to Mr. Bharara or to President Obama. The explosion of insider trading charges started under George W. Bush and his Department of Justice Corporate Fraud Task Force. Nothing less than a total rewrite of the whole moribund welfare state regulatory regime to adhere to the rule of law and limited government can restore American prosperity.

Donald Devine is senior scholar at the Fund for American Studies, the author ofAmerica’s Way Back: Reclaiming Freedom, Tradition and Constitution, and was Ronald Reagan’s director of the U.S. Office of Personnel Management during his first term.