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Second Circuit Insider Trading Decision May Have Broad Impacts on White-Collar Prosecutions

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Last week, the Second Circuit issued a potentially significant decision in an insider-trading case on remand from the Supreme Court. While the Court's decision was not necessarily unexpected in light of a prior concession by the Solicitor General, the court’s analysis may significantly impact both insider trading investigations and broader “fraud” prosecutions going forward.


The case, United States v. Blaszczak, involved allegations that one of the defendants (the “tipper”) who worked for the U.S. government's Center for Medicare and Medicaid Services ("CMS"), gave other defendants (the “tippees”) confidential information about the timing and substance of proposed changes to reimbursement rates for certain types of medical care for various health conditions (“CMS Data”). As alleged by the government, the tippees then used the CMS Data to execute profitable trades in companies that would be impacted by the changed reimbursement rates.

The government charged the defendants with the substantives offenses of (i) securities fraud under Section 10b of the 1934 Exchange Act and Rule 10b-5 ("10b-5 Securities Fraud"); (ii) securities fraud under 18 U.S.C. § 1348 ("1348 Securities Fraud"); (iii) wire fraud, in violation of 18 U.S.C. § 1343; and (iv) conversion of federal government property under 18 U.S.C. § 641, as well as conspiracy to commit those offenses.

At trial, the jury convicted the defendants of 1348 Securities Fraud, wire fraud, and section 641, as well as conspiracy, but acquitted them of substantive Rule 10b-5 Securities Fraud.

The defendants appealed, and the Second Circuit initially affirmed those convictions. 947 F.3d 19 (2d Cir. 2019) (“Blaszczak I”). In doing so, the Second Circuit became one of the first appeals courts to address the scope of insider trading liability under the 1348 Securities Fraud statute. The Second Circuit held that, unlike under Rule 10b-5, where the Supreme Court had held that the government is required to prove that a "tipper" received a personal benefit for providing insider information to "tippees," Section 1348 imposed no such personal benefit requirement.

The Blaszczak defendants then filed for certiorari at the Supreme Court. While that petition was pending, the Supreme Court decided United States v. Kelly, 140 S. Ct. 1565 (2020). In Kelly, the government had charged former New Jersey officials for closing down lanes on a highway toll plaza in retaliation for a local official's failure to endorse New Jersey's then-governor. The government’s theory was that defendants committed wire fraud in violation of 18 U.S.C. § 1343 and fraud on a federally funded entity (the entity than ran the toll plaza) in violation of 18 U.S.C. § 666.

Both charges required proof that the defendants wrongfully obtained "property" belonging to the government, but a unanimous Supreme Court reversed the convictions, rejecting the idea that "the physical [traffic] lanes the defendants commandeered" were government property or that the defendants obtained "property" because their actions "required expenditures of time and labor" by the government employees who ran the toll plaza. More broadly, the Supreme Court suggested that regulatory rights of "allocation, exclusion, and control" "do not create a property interest. Kelly, 140 S. Ct. at 1573.

Following Kelly, the Solicitor General requested that the Supreme Court vacate Blaszczak I and remand the case. The government stated that, in light of Kelly, it now believed the CMS data that Blaszczak defendants had used to conduct illegal trades was no longer "property," and therefore, that the substantive counts of conviction---1348 Securities Fraud, wire fraud, and section 641 should be dismissed.

Blaszczak II

Not surprisingly, in light of the government's concession, in its December 27 opinion, the Second Circuit vacated the Blaszczak defendants' convictions.

In addition to holding that the government’s decision to dismiss was entitled to “deference,” the majority opinion, authored by Judge Kearse, concluded "that in light of Kelly," the wire fraud, 1348 securities fraud, and conversion of government property statutes "do not apply to the conduct that was at issue here." The majority stated that CMS Data was more like a scheme to influence a government's regulatory choice (and thus not property) and less like a scheme to obtain confidential information of a commercial entity, which the Supreme Court held was property in its 1987 decision United States v. Carpenter, 484 U.S. 19, a case in which defendants were convicted of wire fraud based on misappropriating a newspaper’s confidential information about upcoming articles and then using that information to place profitable stock trades. According to the Blaszczak II majority, a main distinction between Carpenter and Blaszczak, was that Carpenter involved a "commercial entity" in "sell[ing]" a product, whereas the CMS data in Blaszczak belonged to a government entity, making it less property-like.

Judge Walker concurred in the judgment, writing separately to note, despite Blaszczak I’s decision to the contrary, it was "odd" that insider trading liability under a Section 1348 Securities Fraud theory did not require proof of a personal benefit to a tipper while insider trading liability under Rule 10b-5 did. Judge Walker further observed that 1348 cases can only be prosecuted criminally, whereas Rule 10b-5 cases can be brought both criminally and civilly, and he voiced concern about the "potential consequences of a legal scheme that requires fewer elements to convict someone criminally than to penalize someone civilly for the same conduct."

Judge Sullivan dissented, stating he "remained convinced that the defendants' convictions should be affirmed" and that "nothing" in Kelly "alters the conclusion that CMS information constituted property in the hands of the government for purposes of the wire fraud statue and Section 1348." Judge Sullivan noted that neither the wire fraud statue nor Section 1348 "distinguishes between tangible and intangible property, or in any way suggests that information in the possession of a government agency as opposed to a private entity is beyond the scope of the statute." Judge Sullivan further found no "meaningful distinction" between newspaper's pre-publication information, found to be property in Carpenter, and CMS data. Judge Sullivan also took issue with the concurrence’s criticisms of the lack of a personal-benefit test in Section 1348, discussing the legislative history of the statute, which, he concluded "make it far more plausible that Congress did not intend for it to be a mere carbon copy of the Title 15 securities-fraud statute."


Despite the forceful dissent, Blaszczak II is now the law in the Second Circuit. Here are several takeaways from this decision:

  • The decision is potentially far-reaching. The majority’s narrow definition of “property” impacts the wire fraud statute and the conversion of property statute, both of which are “workhorse” federal statutes, used in a variety of contexts beyond insider trading and beyond securities fraud more generally.
  • The confidential CMS data was arguably closer to traditional “property” interests than the traffic lanes at issue in Kelly, and akin to the type of information held to be property in Carpenter. However, the Second Circuit majority found it seemingly dispositive that Carpenter involved a commercial entity’s information, but Blaszczak involved a government agency’s. Thus, going forward, we may see litigation over the nature of the property interest in cases involving public-private partnerships or similar entities.

  • Similarly, a number of other federal statutes, including the mail fraud statute, 18 U.S.C. § 1341; the bank fraud statute, 18 U.S.C. §1344; and the health care fraud statue, 18 U.S.C. § 1347, are modeled on the wire-fraud statute and require some deprivation of “money or property prosecutions under these statutes will be impacted as well, particularly where the government (or perhaps a government-like entity) is the alleged victim of the property deprivation.
  • Finally, returning to the insider trading context, following Blaszczak I, it had been thought by many that Section 1348 would be more frequently used by the government to prosecute insider trading, because it lacked the complicated, judge-made law (including the personal benefit test) that had developed around Rule 10b-5 (and the acquittal of the defendants in Blaszczak at trial on Rule 10b-5 charges). Now, with both Blaszczak II’s (i) narrow definition of property and (ii) the concurrence’s criticisms of the lack of a personal-benefit test in Section 1348, it seems like Rule 10b-5, which does not require a deprivation of property, may, after all, remain the securities fraud statute of choice for government insider trading prosecutions.

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