Second Circuit Nixes Theory Of Insider Trading On Confidential Government Agency Information

• Published date: 25 January 2023
• Subject Matter: Corporate/Commercial Law, Government, Public Sector, Criminal Law, Government Contracts, Procurement & PPP, Securities, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Morrison & Foerster LLP
• Author: Mr Edward A. Imperatore, Brian K. Kidd, Brian R. Michael, Peter M. Skinner and Christine Y. Wong

On December 27, 2022, in United States v. Blaszczak ("Blaszczak II"), the U.S. Court of Appeals for the Second Circuit called into question what constitutes "property" in cases of securities fraud, wire fraud and theft of government property. Specifically, the court vacated the convictions of defendants who were found guilty of violating those statutes under prosecutors' theory that they traded on material nonpublic information ("MNPI") obtained from a government agency, holding that a government agency's non-public pre-decisional regulatory information does not constitute "property" or a "thing of value" within the meaning of those offenses.

In a concurring opinion, Judge John M. Walker, Jr., joined by Judge Amalya L. Kearse, also noted the "asymmetry" in the requirements for insider trading under Title 18 securities fraud as compared to the Securities Exchange Act of 1934 (the "Exchange Act"), expressing concern about the government's use of Title 18 securities fraud statutes to prosecute insider trading offenses without proof of a "personal benefit" to the person supplying the insider information (the "tipper").

Takeaways

• The court's reasoning narrows the scope of federal insider trading cases that can be brought if the alleged confidential information was obtained from government agencies and the government is alleged to be a victim of a deprivation or conversion of its confidential information.
• The court's definition of property may narrow the scope of criminal cases that do not involve insider trading but allege theft of, or fraud involving, government property, including wire fraud mail fraud, or health care fraud cases.
• Further, Judge Walker's and Judge Kearse's concurring view that the government is required to prove a personal benefit to sustain a federal insider trading conviction has potentially significant implications. Although not binding precedent, it cautions against and could dissuade the government from continuing to use the Title 18 securities fraud statute to prosecute insider trading without proof of a personal benefit to a tipper.
• The court's holding, which distinguishes between confidential information of government agencies and that of commercial entities, does not affect insider trading cases involving MNPI of public companies and other non-government sources.

Background

The Indictment and Trial

In the underlying district court case, the government alleged that four defendants participated in schemes in which employees from federal Centers for Medicare and Medicaid Services ("CMS") obtained MNPI...