In United States v. Blaszczak,[i] a divided panel of the Second Circuit held that the federal wire fraud statute and a rarely used securities fraud statute criminalize insider trading beyond the reach of what is covered by the statute historically used to prosecute the offense. The decision may lead to an increase in insider trading prosecutions, including those involving trading on confidential governmental information.
The Blaszczak Prosecution
In May 2017, the U.S. Attorney’s Office for the Southern District of New York charged “political intelligence” consultant David Blaszczak and three others in connection with alleged schemes to obtain confidential information from the federal agency Centers for Medicare and Medicaid Services (“CMS”) about upcoming changes to CMS rules governing reimbursement rates for certain medical treatments. According to the charges, Blaszczak obtained this confidential market-moving information from a CMS employee, and then tipped hedge fund employees who traded on it.
The indictment alleged that the defendants’ conduct violated not just the securities fraud statute enacted in Title 15 by the Securities Exchange Act of 1934, which is traditionally charged in insider trading cases, but other criminal statutes, including wire fraud and a rarely-prosecuted securities fraud statute added to Title 18 of the U.S. Code by the Sarbanes-Oxley Act of 2002. At trial, the district court instructed the jury that to convict on the Title 15 securities fraud charge – but not the remaining charges – the jury must find that the CMS employee provided the confidential information to Blaszczak in return for a “personal benefit” and that Blaszczak and the defendants who traded on the confidential information knew this.
After four days of deliberations, the jury reached a split verdict, acquitting all defendants on the Title 15 securities fraud charges, but convicting certain defendants on the wire fraud and Title 18 securities fraud charges.
The Second Circuit affirmed the convictions. First, the Court held that confidential information such as the CMS information at issue constituted “property” in the hands of the government for purposes of the wire fraud and Title 18 securities fraud statute. Second, the Court held that proof that the CMS employee provided the information to Blaszczak in return for a personal benefit – or that Blaszczak or the traders knew the information was from a CMS employee breaching a duty for such a benefit – was not required under the wire fraud or Title 18 securities fraud statute. Reasoning that Title 18 securities fraud “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 provisions,” the Court “decline[d] to graft the Dirks[ii] personal-benefit test onto the elements of Title 18 securities fraud.” The Court similarly reasoned that case law on the federal wire fraud statute provided for a broader concept of fraud than in the more narrowly-purposed Title 15 securities fraud statute.
Blaszczak’s implications are significant.
First, the Second Circuit’s holding gives federal prosecutors several statutes to choose from when charging insider trading or fraud involving confidential government information. Indeed, in addition to holding that the confidential CMS information was “property” under the wire fraud and Title 18 securities fraud statutes, the Court also ruled that this information was a “thing of value” under the federal conversion statute, giving prosecutors still another tool to police trading on, misappropriating, or stealing government information.
Second, the Second Circuit’s holding that the Title 18 securities fraud statute (and the wire fraud statute) do not require proof of a “personal benefit” allows prosecutors to sidestep one of the more challenging requirements of the Title 15 securities fraud statute historically used in insider trading prosecutions. That is particularly important because the law of what it means to obtain a “personal benefit” has been shifting significantly in recent years and is still not entirely settled.[iii]
The decision is not without limitations, however. The expanded insider trading toolkit bestowed by the Second Circuit is only available in criminal prosecutions, as Title 18 is limited to criminal cases. The Securities and Exchange Commission, which pursues insider trading through civil charges, under a lower standard of proof, is limited to the narrower Title 15 securities fraud statute. Second, the opinion was accompanied by a dissent, arguing that a Supreme Court case decided in 2000 requires the finding that CMS’s information is not “property” under the federal fraud statutes because “CMS is not a business” and the agency’s planned regulation is not its “stock in trade.”[iv] A likely petition for rehearing en banc by the entire Second Circuit and/or review by the Supreme Court leaves the insider trading landscape unsettled. Prosecutors are thus likely to continue to include Title 15 securities fraud charges in insider trading prosecutions, providing a backstop evenas new statutes with broader reach are also charged.