United States v. Blaszczak

947 F.3d 19

UNITED STATES of America, Appellee,

v.David BLASZCZAK, Theodore Huber, Robert Olan, Christopher Worrall, Defendants-Appellants.

Docket Nos. 18-2811

18-2825

18-2867

18-2878

August Term 2019

United States Court of Appeals, Second Circuit.

Argued: November 21, 2019

Decided: December 30, 2019

SARAH K. EDDY, Assistant United States Attorney (Ian McGinley, Joshua A. Naftalis, Won S. Shin, Assistant United States Attorneys, on the brief), for Geoffrey S. Berman, United States Attorney for the Southern District of New York, New York, NY, for Appellee United States of America.

DONALD B. VERILLI, JR. (Elaine J. Goldenberg, Jonathan S. Meltzer, on the brief), Munger, Tolles & Olson LLP, Washington, D.C., David Esseks, Eugene Ingoglia, Rachel Agress, Alexander Bussey, on the brief, Allen & Overy LLP, New York, NY, for Appellant Robert Olan.

ALEXANDRA A.E. SHAPIRO (Eric S. Onley, on the brief), Shapiro Arato Bach LLP, New York, NY, Dani R. James, on the brief, Kramer Levin Naftalis & Frankel, LLP, New York, NY, for Appellant Theodore Huber.

COLLEEN P. CASSIDY, Federal Defenders of New York, Inc., New York, NY, for Appellant David Blaszczak.

DANIEL M. SULLIVAN (James M. McGuire, on the brief), Holwell Shuster & Goldberg LLP, New York, NY, Stephen Fishbein, John A. Nathanson, on the brief, Shearman & Sterling LLP, New York, NY, for Appellant Christopher Worrall.

Peter Neiman, Wilmer Cutler Pickering Hale and Dore LLP, New York, NY, Lindsay A. Lewis, Joshua L. Dratel, P.C., New York, NY, for Amicus Curiae National Association of Criminal Defense Lawyers.

Kendall Turner, O’Melveny & Myers LLP, Washington, D.C., Anton Metlitsky, O’Melveny & Myers, LLP, New York, NY, for Amici Curiae Law Professors Adam C. Pritchard, Matthew C. Turk, Andrew N. Vollmer, Karen Woody.

Before: Kearse, Droney, and Sullivan, Circuit Judges.

Richard J. Sullivan, Circuit Judge:

These consolidated appeals require us to consider whether the federal wire fraud, securities fraud, and conversion statutes, codified at 18 U.S.C. §§ 1343, 1348, and 641, respectively, reach misappropriation of a government agency’s confidential nonpublic information relating to its contemplated rules. Defendants David Blaszczak, Theodore Huber, Robert Olan, and Christopher Worrall were charged with violating these statutes – and with engaging in securities fraud in violation of Section 10(b) of the Securities and Exchange Act, 15 U.S.C. § 78j(b), and SEC Rule 10b-5 ("Title 15 securities fraud") – by misappropriating confidential nonpublic information from the Centers for Medicare & Medicaid Services ("CMS"). The indictment principally alleged that CMS employees, including Worrall, disclosed the agency’s confidential information to Blaszczak, a "political intelligence" consultant for hedge funds, who in turn tipped the information to Huber and Olan, employees of the healthcare-focused hedge fund Deerfield Management Company, L.P. ("Deerfield"), which traded on it. After a one-month trial before the United States District Court for the Southern District of New York (Kaplan, J. ), a jury found Defendants guilty of wire fraud, conversion, and, with the exception of Worrall, Title 18 securities fraud and conspiracy. The jury acquitted Defendants on all counts alleging Title 15 securities fraud.

Defendants now challenge their convictions on various grounds. For the reasons set forth below, we reject these challenges. In doing so, we hold, inter alia , that (1) confidential government information such as the CMS information at issue here may constitute "property" in the hands of the government for purposes of the wire fraud and Title 18 securities fraud statutes, and (2) the "personal-benefit" test established in Dirks v. SEC , 463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983), does not apply to these Title 18 fraud statutes. Because we also discern no prejudicial error with respect to the remaining issues raised on appeal, we affirm the judgments of the district court.

I. BACKGROUND

A. Facts

The jury returned guilty verdicts on counts charging two insider-trading schemes: (1) a scheme relating to Deerfield that involved all defendants to varying degrees, and (2) a scheme relating to another hedge fund investment manager, Visium Asset Management, L.P. ("Visium"), that involved Blaszczak only. We recite the facts pertaining to each of these schemes in turn, construing the evidence at trial underlying the counts of conviction in the light most favorable to the prosecution. See United States v. Kirk Tang Yuk , 885 F.3d 57, 65 (2d Cir. 2018).

1. The Deerfield Scheme

At various times between 2009 and 2014, Olan, Huber, and fellow Deerfield partner Jordan Fogel – a cooperating witness who pleaded guilty and testified at trial – approached Blaszczak for the purpose of obtaining so-called "predecisional" information concerning CMS’s contemplated rules and regulations. The three Deerfield partners knew that Blaszczak, who had worked at CMS before becoming a consultant for hedge funds, enjoyed unique access to the agency’s predecisional information through his inside sources at the agency. Because other consultants did not have access to Blaszczak’s sources, the Deerfield partners counted him as a particularly lucrative fount of illegal market "edge." App’x at 567, 606.

This illegal market edge first paid off for the three Deerfield partners in July 2009, after Blaszczak passed them nonpublic CMS information concerning both the timing and substance of an upcoming proposed CMS rule change that would reduce the reimbursement rate for certain radiation oncology treatments. The Deerfield partners sought to maximize this market edge by trading while "the information wasn’t known to others, and ... wasn’t public." Id. at 593. In late June 2009, Olan, Huber, and Fogel directed Deerfield to enter orders shorting approximately $33 million worth of stock in radiation-device manufacturer Varian Medical Systems ("Varian"), a company that would be hurt by CMS’s proposed rule. Blaszczak’s information was consistent with the proposed rule that CMS ultimately announced on July 1, 2009, and as a result of the Varian trade, Deerfield made $2.76 million in profits.

Deerfield again traded on confidential CMS information obtained from Blaszczak in 2012. This time, Blaszczak obtained the predecisional information at issue from Worrall, a CMS employee who had previously worked with Blaszczak at the agency and remained friends with him after Blaszczak left CMS to become a hedge fund consultant. Blaszczak met Worrall at CMS’s headquarters in Maryland on May 8, 2012; the following day, Blaszczak emailed Fogel to set up a phone call so that he could update him on one of Fogel’s "favorite topics." Id. at 2439. On the call, Blaszczak provided Fogel with predecisional CMS information about additional radiation oncology reimbursement rate changes. Fogel, in turn, shared this information with Huber and Olan, and together the three of them relied on it – in combination with other confidential CMS information that Blaszczak passed them over the next few weeks – in recommending that Deerfield short millions of dollars in the shares of companies that would be hurt by the reimbursement changes. Deerfield earned profits of $2.73 million from trades relating to this radiation oncology rule, which was publicly announced on July 6, 2012.

In February 2013, shortly after Fogel moved to a different group within Deerfield, he reached out to Blaszczak in the hopes of "re-ignit[ing] the Blaszczak-Fogel money printing machine." Supp. App’x at 6. As Fogel testified at trial, the "Blaszczak-Fogel money printing machine" meant that "Blaszczak had a long history of providing [Fogel] and [his] teammates nonpublic information that [they] could trade on, and it was a great asset to get edge for investments." App’x at 581.

Fogel did not have to wait long for the machine to reignite. In June 2013, Blaszczak told Fogel that he expected CMS to propose cutting the reimbursement rate for end-stage renal disease ("ESRD") treatments by 12 percent. Although Blaszczak did not reveal the source of his information to Fogel, the prediction was so specific – and so different from the market consensus – that Fogel believed it came "from a credible source inside of CMS." Id. at 582. Still, Fogel remained anxious about the outlier status of Blaszczak’s prediction and continued to check in with him about his level of certainty. On June 25, 2013, less than a week before CMS announced the ESRD rule, Blaszczak told Fogel that there was "[n]o change in [his] numbers" and that he was "pretty confident" in his information. Id. at 2024. Fogel again took this to mean that Blaszczak obtained the information from a reliable inside source, and further inferred that the public announcement of the proposed rate cut (the timing of which was also nonpublic) was around the corner and thus less likely to change. On the basis of this confidential nonpublic information, Fogel directed Deerfield to enter orders shorting stock in Fresenius Medical Care, a public company that would be hurt by the reimbursement rate cuts. CMS publicly announced the 12 percent rate cut on July 1, 2013, and Deerfield earned approximately $860,000 in profits from the trade.

Blaszczak continued to provide Fogel with predecisional CMS information in advance of CMS’s announcement of the final ESRD rule on November 22, 2013. In particular, Blaszczak informed Fogel that the final ESRD rule would keep the 12 percent rate cut but would be phased in over three to four years. Based on that information, Fogel recommended that Deerfield enter orders to short stock in Fresenius and DaVita Healthcare Partners Inc. Deerfield did so, earning profits of approximately $791,000. Immediately after CMS announced the final ESRD rule, Fogel emailed his colleagues at Deerfield to praise Blaszczak for his ESRD reimbursement predictions: "I told u guys blazcack [sic] is the man. ... [H]e has crushed it on these two rules both times...