On January 11, 2021, the U.S. Supreme Court vacated the 2019 decision of the U.S. Court of Appeals for the Second Circuit in United States v. Blaszczak,[1] which substantially broadened the scope of criminal insider trading liability, and remanded the case to the Second Circuit for further consideration in light of the Supreme Court’s decision last year in Kelly v. United States.[2]
The Second Circuit held in Blaszczak that the government’s often challenging burden under the Securities Exchange Act to prove that the insider received a “personal benefit” in exchange for tipping inside information, and that the insider’s “tippees” were aware of that, does not apply to insider trading charges under the separate criminal securities fraud statute in Title 18 of the U.S. Code. Blaszczak thus brought about a potentially significant expansion of the circumstances in which trading on material non-public information may amount to criminal securities fraud. The Supreme Court’s vacatur and remand to the Second Circuit call that expansion into question.
Blaszczak involved the disclosure by employees of the Centers for Medicare & Medicaid Services (CMS) of nonpublic “predecisional” information about planned changes to reimbursement rates for certain medical treatments. The government’s indictment alleged that the employees tipped David Blaszczak, a former CMS employee who was working as a political intelligence consultant at the time. Blaszczak, in turn, allegedly tipped three partners of a healthcare-focused hedge fund, which profitably traded on the information between 2009 and 2013.
The government charged Blaszczak, a CMS employee, and two of the hedge fund partners with Title 15 securities fraud under Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, as well as securities fraud under 18 U.S.C. § 1348, a separate and seldom-used statute added to Title 18 by the Sarbanes-Oxley Act of 2002. (The U.S. Department of Justice (DOJ) can prosecute insider trading criminally under both the Exchange Act and Section 1348, while the SEC is limited to civil insider trading enforcement under the Exchange Act.) It also charged them with wire fraud under 18 U.S.C. § 1343. Sections 1343 and 1348 make it a crime to obtain fraudulently “any money or property” through interstate wires or in connection with a security, respectively.
The district judge instructed the jury that under Dirks v. SEC,[3] in order to convict the defendants of Title 15 securities fraud, it needed to find that the CMS insider disclosed the rate information in exchange for a personal benefit, and that Blaszczak and the hedge fund defendants knew that.[4] However, the court refused to give similar instructions on the Title 18 counts. The jury acquitted all defendants on the Title 15 counts, but convicted Blaszczak and the hedge fund defendants on the Title 18 charges. The defendants appealed their convictions to the Second Circuit on the grounds that (1) the predecisional CMS information was not “property” within the meaning of the Title 18 statutes, and (2) the district court erred in refusing to instruct the jury on the Dirks “personal benefit” test with respect to the Title 18 charges.
As to the first issue, the defendants argued that the predecisional information was akin to a state license, which the Supreme Court held in Cleveland v. United States not to be property under the federal mail fraud statute, because the state’s interest in issuing the licenses (in that case, to operate video poker machines) was “purely regulatory” and not economic.[5] The Second Circuit disagreed, holding that the predecisional information constituted property because CMS possesses a “right to exclude” others from using it, similar to the right exercised by the Wall Street Journal over its “Heard on the Street” column, which the Supreme Court found to be property for insider trading purposes in Carpenter v. United States.[6]
On the second issue – whether the Dirks “personal benefit” requirement applies to Title 18 securities fraud – the Second Circuit again rejected the defendants’ argument. The court reasoned that the courts created the personal benefit test in order to serve the specific statutory purpose of the Title 15 fraud...
