On December 30, 2019, the Second Circuit issued its United States v. Blaszczak1 opinion, eliminating a serious hurdle that might otherwise dissuade federal prosecutors from pursuing a Title 18 fraud claim against an alleged inside trader. The court determined that, unlike Title 15 securities fraud, federal wire fraud and Title 18 securities fraud claims do not require proof that the alleged insider received any personal benefit in exchange for the disclosure of non-public information.

In Blaszczak, federal prosecutors alleged that an employee of the Centers for Medicare & Medicaid Services (CMS) had been illegally disclosing information about reimbursement rate adjustments to a political consultant, who in turn, had been forwarding the information to a group of hedge fund managers, who were trading and profiting on the non-public information.

After the presentation of evidence, the district court instructed the jury that, in order to convict the defendants with Title 15 securities fraud, they would have to find the defendants received a “personal benefit” in exchange for the disclosure of non-public information. However, the court did not include the same “personal benefit” instruction in its Title 18 charge. After many days of deliberation, the jury acquitted each defendant on all counts alleging Title 15 securities fraud, but found the CMS employee guilty on one count of wire fraud, the political consultant guilty on two counts of wire fraud and two counts of Title 18 securities fraud, and the hedge fund managers guilty on one count of wire fraud and one count of Title 18 securities fraud.

On appeal to the Second Circuit, the appellants argued that pursuant to the Supreme Court’s Dirks v. SEC2 opinion, the district court erred by not including the “personal benefit” instruction in its Title 18 question. The Second Circuit rejected appellants’ argument, reasoning that Title 15 and Title 18 were enacted for very different purposes. Title 15 (the statute at issue in Dirks) was enacted as part of the Securities and Exchange Act of 1934. While Title 18 was enacted as part of the Sarbanes-Oxley Act of 2002. And, despite both statutes prohibiting schemes to “defraud,” the meaning of the operative term was not shared.

According to the court, Title 15 was enacted for the limited purpose of eliminating insider trading for “personal advantage.” Whereas, Title 18 “was intended to provide prosecutors with a different and broader—enforcement mechanism to address securities fraud than what had been previously provided in the Title 15 fraud provision;” it was purposed to overcome the “technical legal requirements” that other fraud provisions created.

The court determined that because the statutes were enacted for two very different purposes and because the personal benefit test in Dirks was “judge-made doctrine” specifically premised on the limited purpose of Title 15, the personal benefit test should not apply to Title 18 securities fraud claims. Still, the court rejected appellants’ argument that the district court had opened a “backdoor” through which prosecutors could effectively pursue securities fraud claims that would otherwise require proof of a personal benefit. The court rejected this argument, stating that there will always be statutory overlap—where prosecutors can choose between multiple statutory causes of action for the same underlying conduct—but that such overlap is no reason to ignore legislative intent. According to the court, if the legislature believed they had inadvertently created a “backdoor,” it was up to them to intentionally close it.

The takeaway is simple. Whether or not the alleged disclosing party has secured any benefit by sharing non-public information, it could face criminal liability for its actions. Defense attorneys should be cognizant of Title 18’s requirements when assessing the chances of acquittal and make their clients aware of such risk.