Earlier this month, the Supreme Court vacated and remanded a high-profile insider trading case, United States v. Blaszczak, to the Second Circuit “for further consideration in light of Kelly v. United States.”[1] Kelly is more commonly known as the “Bridgegate” decision, in which the Supreme Court restricted the application of federal fraud statutes to schemes seeking to obtain property, to the exclusion of schemes primarily targeting regulatory actions by government officials. In light of the remand, the Second Circuit will now reconsider its endorsement in Blaszczak of liability under Title 18 for a scheme targeting “political intelligence.”
As discussed in prior alert memos, in Blaszczak, the Second Circuit made it easier to prosecute tippee insider trading cases under Title 18’s federal wire and mail fraud statutes (§§ 1341, 1343) and securities fraud statute (§ 1348), as compared to the Title 15’s securities fraud provisions.[2] David Blaszczak was a “political intelligence” consultant who, through former colleagues at a government agency, the Centers for Medicare & Medicaid Services (“CMS”), learned of forthcoming changes in Medicare and Medicaid reimbursement rates for particular medical procedures.[3] He shared this confidential information with hedge funds that then traded on the information before it became public, making millions of dollars.[4]
The Second Circuit’s decision affirming Blaszczak and the tippee’s convictions included two notable holdings. First, the Second Circuit held that under Title 18 (unlike Title 15) the government did not need to prove a “personal benefit” for the tippee.[5] Second, and most relevant to the Supreme Court’s decision to vacate and remand, two of the three panel members (Judge Sullivan and now-retired Judge Droney)[6] rejected the argument that the alleged victim of the fraud, CMS, had a “purely regulatory” interest in its pre-decisional information and that the information was therefore not “property” within the meaning of Title 18 and other federal fraud statutes.[7] The majority reasoned that CMS had a “right to exclude” that was akin to a private interest and that CMS had an economic interest in that it “invests time and resources into generating and maintaining the confidentiality of its non-public pre-decisional information,” thereby acting as a “property holder, not as sovereign.”[8] Judge Kearse’s dissent, however, reached the conclusion that CMS’s interest in issuing a regulation was not “property” under the federal fraud statutes because CMS is “an agency of the government that regulates the conduct of others. It does so whether or not any information on which its regulation is premised is confidential.”[9]
Five months after the Second Circuit decided Blaszczak, the Supreme Court unanimously held in Kelly v. United States that the use of regulatory authority to close two lanes of the George Washington Bridge in retaliation against a mayor who refused to endorse then-Governor Chris Christie, did not concern a “property” interest under Title 18 federal fraud statutes.[10] The Court explained that taking control over the bridge’s traffic lanes was a “quintessential exercise of regulatory power” and not an appropriation of government property.[11] Further, the Court concluded that the public funds used to pay toll collectors and traffic engineers as a result of the lane realignment, while property, were “only an incidental byproduct of the scheme” rather than its object, and could not sustain a property fraud conviction on their own.[12]
After the Supreme Court decided Kelly, the defendants in Blaszczak filed petitions for writs of certiorari, seeking review of both the questions of whether regulatory information constitutes property and whether the personal benefit test applies to Title 18 charges.[13] With respect to the property issue, the defendants aimed to capitalize on Judge Kearse’s dissent and argued that the Second Circuit’s ruling could not be reconciled with Kelly because “[t]he government has no ‘traditional’ economic interest in [predictive regulatory] information . . . which the government does not sell,” and the disclosure of...
