The Second Circuit's Blaszczak Decision Fails To Resolve One Issue, Raises New Ones

• Jurisdiction: United States,Federal
• Law Firm: WilmerHale
• Subject Matter: Corporate/Commercial Law, Criminal Law, Securities, White Collar Crime, Anti-Corruption & Fraud
• Author: Ms Elizabeth Mitchell, Mark D. Cahn and Brett Atanasio
• Published date: 30 January 2023

On December 27, 2022'nearly 18 months after hearing oral arguments'the Second Circuit issued its new opinion in United States v. Blaszczak,¹ an important insider trading case involving the misappropriation of confidential non-public government information.² The Second Circuit ruled in favor of the defendants, holding that the confidential government information on which defendants allegedly traded was not "property" and therefore could not serve as the basis for a securities fraud prosecution under 18 U.S.C. ' 1348, wire fraud under 18 U.S.C. ' 1343, or conversion of government property under 18 U.S.C. ' 641.³ Critically, the Second Circuit majority opinion did not address whether an insider trading prosecution brought under 18 U.S.C. ' 1348 requires proof of a personal benefit, the way charges brought under Securities Exchange Act ' 10(b)⁴ and Rule 10b-5⁵ do.⁶ Equally important to insider trading jurisprudence, the Court's majority opinion could be interpreted as limiting the type of information capable of supporting a ' 1348 securities fraud charge to information that has economic value to a commercial entity'yet another issue left open for future cases.

As we have discussed in prior client alerts, in Blaszczak the government charged several individuals in a "tipping" scheme after David Blaszczak, a political intelligence consultant and former employee of the Center for Medicare and Medicaid Services ("CMS"), received non-public information about prospective changes to Medicare reimbursement rates from a former colleague still working at CMS.⁷ Blaszczak shared this information with two hedge fund clients, who then traded in securities of companies that would be affected by the rate changes.⁸ The defendants were charged with securities fraud under ' 10(b) of the Securities Exchange Act and Rule 10b-5, wire fraud, securities fraud, and conversion under Title 18 of the criminal code,⁹ and certain conspiracy offenses.¹⁰ At trial, the jury acquitted the defendants of the insider trading charges brought under ' 10(b) and Rule 10b-5, but returned a conviction on the various ' 1348 securities fraud, wire fraud, conversion of government property, and conspiracy offenses.¹¹

The first time the defendants' appeal was heard by the Second Circuit, the defendants argued that insider trading charges based on ' 1348 required proof of a personal benefit to the tipper, like charges under Title 15.¹² The Second Circuit rejected this argument and held that there was no...