United States v. Blaszczak Continues to Reshape Insider Trading Law

• Jurisdiction: United States,Federal
• Law Firm: Schulte Roth & Zabel
• Subject Matter: Litigation, Mediation & Arbitration, Criminal Law, Trials & Appeals & Compensation, White Collar Crime, Anti-Corruption & Fraud
• Author: Mr Gary Stein, Charles J. Clark, Craig S. Warkol, Peter H. White, Douglas Koff and Benjamin Lewson
• Published date: 06 March 2023

On Dec. 27, 2022, the U.S. Court of Appeals for the Second Circuit issued another decision in United States v. Blaszczak ("Blaszczak II"), this time delivering a victory to defendants accused of insider trading based on non-public predecisional government information.¹ The case was heard by the Second Circuit following remand from the Supreme Court after its ruling in Kelly v. United States, 140 S. Ct. 1565 (2020), clarifying what can be considered "property" under federal criminal statutes. We had previously written about the Blaszczak case while the decision from the Second Circuit was pending² and, earlier, after the Second Circuit's initial ruling in the case.³

Blaszczak is a prime example of how the law of insider trading is judge-made. To bring insider trading cases in the absence of a federal statute targeting insider trading, prosecutors have adapted various more general statutes, including the anti-fraud prohibitions in Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder and, increasingly, a potpourri of other federal statutes. Blaszczak illustrates the overlapping, conflicting and uncertain scope of these different laws. Going forward, Blaszczak will continue to influence how insider trading cases are prosecuted, although what impact it will have remains to be seen.

Background

The underlying prosecution was brought based on allegations that David Blaszczak shared non-public information given to him by Christopher Worrall, an employee of the Centers of Medicare and Medicaid Services ("CMS") at the time. The information related to upcoming announcements by CMS adjusting the reimbursement rates for Medicare and Medicaid services. Blaszczak allegedly shared this information with hedge fund analysts Robert Olan and Theodore Huber so they could make investments relating to public companies with the understanding that this news would impact those companies' stock prices.

In 2017, the U.S. Attorney's Office in Manhattan brought insider trading charges against all four individuals, emphasizing that "[j]ust like trading on material nonpublic corporate information can be a federal crime, so can trading based on secret government information, as alleged to have happened here."⁴ In time, this announcement would prove less than prescient.

In 2018, a jury in the Southern District of New York acquitted all four defendants on charges that they committed securities fraud under ' 10(b), but found the defendants guilty of several other crimes under other statutes, including violating and/or conspiring to violate:

• 18 U.S.C. ' 1343, the federal wire fraud statute;
• 18 U.S.C. ' 1348, a federal criminal securities fraud statute that is separate from ' 10(b) and was enacted in 2002 as part of the Sarbanes-Oxley Act;
• 18 U.S.C. ' 641, which makes it a crime to convert property of the United States; and
• 18 U.S.C. ' 371, which outlaws conspiracies to defraud the United States.

The Appeals - Blaszczak I

The Blaszczak defendants...