Blaszczak II: 2nd Circuit Reverses Course And Overturns Insider Trading Convictions

• Jurisdiction: United States,Federal
• Law Firm: Akin Gump Strauss Hauer & Feld LLP
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Criminal Law, Corporate and Company Law, Trials & Appeals & Compensation, Securities, White Collar Crime, Anti-Corruption & Fraud
• Author: Mr Peter I. Altman, Michael Asaro, James J. Benjamin Jr., Paul W. Butler, Charles F. Connolly, Estela Diaz, Anne M. Evans, Katherine Rachel Goldstein, Ian Patrick McGinley, Claudius B. Modesti, Parvin Daphne Moyne and Kendall Lewis Manlove
• Published date: 02 February 2023

Key Points

• In the wake of the Supreme Court's "Bridgegate" decision in Kelly v. United States, a divided panel in the 2nd Circuit reversed its prior decision in United States v Blaszczak, and held that a federal agency did not have a property interest in confidential information concerning reimbursement rates for health care providers. The court further held that trafficking in such information did not meet the statutory definition of fraud or the conversion of government property under Title 18.
• This decision will have broad implications for future prosecutions under Title 18 and possibly any statutory scheme involving the use or misuse of government property.
• The government's concession that Kelly applied to the conduct in Blaszczak is noteworthy and raises questions as to how the government and the courts will interpret the scope of Kelly, and now Blaszczak, in future cases and whether it may even extend to confidential information belonging to private actors.
• Whereas recent 2nd Circuit decisions created a measure of stability in the law of insider trading post-United States v Martoma, 894 F.3d 64 (2d Cir. 2018) ("Martoma II"), this divided opinion will likely serve to destabilize insider trading jurisprudence anew.

On December 27, 2022, the 2nd Circuit issued its second decision in United States v. Blaszczak, 56 F.4th 230 (2d Cir. 2022) ("Blaszczak II") following the Supreme Court's vacatur and remand of its prior decision upholding the convictions of defendants David Blaszczak, Theodore Huber, Robert Olan and Christopher Worrall. United States v. Blaszczak, 947 F.3d 19 (2d Cir. 2019) ("Blaszczak I"). On remand, a divided three-judge panel granted the government's request to remand the cases to the district court to dismiss all except the two conspiracy convictions, which the panel vacated and remanded for reconsideration before a jury. While the result was not entirely surprising in light of the Department of Justice's concessions in response to recent Supreme Court precedent, Blaszczak II will have a significant impact on insider trading and fraud prosecutions and beyond.

Blaszczak I

In March 2018, the government filed a superseding indictment in the Southern District of New York alleging that Worrall, an employee at the Centers for Medicare & Medicaid Services (CMS), had disclosed CMS's confidential information to Blaszczak, a hedge fund consultant, regarding the timing and substance of proposed CMS rule changes that would affect the Medicare and Medicaid reimbursement rates for certain types of medical care. Blaszczak then tipped Huber and Olan, employees at a health care-focused hedge fund, and they shorted shares of companies that would be negatively affected by the reimbursement rate changes. The government's indictment included counts for Title 15 securities fraud, wire fraud (18 U.S.C. ' 1343), Title 18 securities fraud (18 U.S.C. ' 1348), conversion of U.S. property (18 U.S.C. ' 641) and conspiracy. On May 3, 2018, a jury acquitted all defendants on the Title 15 securities fraud counts, but found all of the defendants guilty on at least some Title 18 fraud and conversion counts and, with the exception of Worrall, on the conspiracy counts.

In December 2019, the 2nd Circuit upheld the convictions in Blaszczak I. The panel held that (i) the confidential information misappropriated from CMS constituted "property" or "a thing of value"...