This spring, the Second Circuit will revisit its highly consequential insider trading decision in United States v. Blaszczak.1 The case is one to watch, as it has the potential to impact how the government approaches prosecutions of participants in tipping schemes.
On January 11, 2021, the Supreme Court vacated the Second Circuit’s 2019 decision in Blaszczak and remanded the case for further consideration2 in light of Kelly v. United States.3 In Blaszczak, the Second Circuit had upheld the convictions of participants in an alleged tipping scheme for securities fraud under Title 18 of the criminal code, notwithstanding that they were acquitted on insider trading charges under Section 10(b) of the Securities Exchange Act.4 The Second Circuit’s decision was predicated in part on the majority’s assessment that the nonpublic information related to agency decision-making on which the tippees traded could constitute “property”5—a holding the Supreme Court’s intervening decision in Kelly calls into question. Notably, by vacating the decision, the Supreme Court did not have occasion to reach the merits of Blaszczak’s other significant holding6—that tipping schemes charged under Title 18 do not need to satisfy the same requirements for insider trading cases charged under Section 10(b), including the “personal benefit” requirement.7
In Blaszczak, the government charged several individuals in a tipping scheme involving confidential information from the Centers for Medicare & Medicaid Services (CMS) about upcoming changes to Medicare reimbursement rates.8 According to the government, David Blaszczak, a political intelligence consultant and former CMS employee, received information from a current CMS employee and shared it with individuals at two hedge funds, who then traded in shares of companies that would be impacted when the rate changes became public.9 The government charged Blaszczak, his tipper and his tippees with securities fraud under Section 10(b) of the Securities Exchange Act as well as wire fraud and securities fraud under Title 18 of the criminal code (18 U.S.C. § 1343 and § 1348, respectively), among other charges.10 After a trial, the jury acquitted the defendants on the Section 10(b) charges but convicted on the Title 18 charges.11 The Second Circuit upheld the convictions on appeal.12
In our prior Client Alerts discussing Blaszczak,13 we focused on the portion of the appeal that addressed the requirements for an insider trading prosecution under 18 U.S.C. § 1348, the general securities fraud statute that was added to the criminal code by the Sarbanes-Oxley Act of 2002. Most critically, the Second Circuit held that prosecutions for insider trading under Section 1348 do not require all of the same elements as prosecutions under Section 10(b).14 We noted that the ruling cleared a path for prosecutors to sidestep the personal benefit test set forth in Dirks v. SEC,15 raising the prospect that a person could be criminally prosecuted for securities fraud for tipping schemes under Title 18 that could not be reached in a civil securities fraud action brought by the Securities and Exchange Commission (SEC).
While Kelly did not involve Section 1348 and was not a securities fraud case, Kelly is relevant to the Second Circuit’s separate holding on whether confidential information related to agency decision-making constitutes property for purposes of Title 18 securities and wire fraud.
The charges in Kelly arose out of the infamous “Bridgegate” scandal. In Bridgegate, several New Jersey officials allegedly altered the flow of traffic onto the George Washington Bridge to create a traffic jam and punish the mayor of Fort Lee for not endorsing then-Governor Chris Christie’s reelection campaign.16 The officials were convicted of wire fraud, federal program fraud and conspiracy.17 The Supreme Court reversed the convictions, finding that both the wire fraud and the federal program fraud statutes require a fraud to obtain money or property, and there was no property (or money) at the heart of the Bridgegate scheme.18 Instead, the scheme involved the abuse of the government’s regulatory power to control traffic for an improper purpose, and the Court had previously held in Cleveland v. United States19 that abuse of regulatory authority alone did not implicate property for purposes of federal fraud statutes.20 The Court also rejected the argument that government property was implicated by virtue of the state employees’ time and labor required to implement the scheme, which the Court viewed as incidental results of the scheme and not its “object.”21
Briefing on the implications of Kelly for the Blaszczak appeal is underway, with oral argument scheduled to be heard by the Second Circuit in April 2021. Notably, Judge Droney, who joined the 2-1 majority in the Second Circuit’s original Blaszczak decision on the property question, retired in January 2020. This leaves the remaining two judges from the original panel deadlocked between Judge Sullivan, whose majority opinion largely relied on a different Supreme Court decision, Carpenter v. United States, for the proposition that confidential government information can be a property interest, and Judge Kearse, who dissented on the property question, relying on Cleveland.22 Depending on the views of the third judge to join the panel (and on Judge Sullivan’s reaction to Kelly), the panel may very well rule differently on the property question on remand. To the extent that it does, the panel might not need to reach the personal benefit question and other non-property questions. This uncertainty means that Blaszczak will remain an important case to watch as it heads back to the Second Circuit, with important decisions on the contours of insider trading liability possibly to come.
As we await the outcome of Blaszczak from the Second Circuit, insider trading continues to be a priority for the government. For example, the SEC’s former Enforcement Division leadership emphasized last year that the Division is focused on increased risks of insider trading stemming from the COVID-19 pandemic, with potentially more material, nonpublic information circulating and more individuals with access to that information.23 Legislation that would explicitly define and codify insider trading remains a possibility, although legislation passed in the House of Representatives during the previous Congress has not progressed in the Senate since our Client Alert discussing that legislation.24