Locke Lord QuickStudy: Second Circuit Ruling May Make Insider Trading Easier to Prosecute

A recent ruling from the Second Circuit could make it easier for federal prosecutors to pursue insider trading charges.

In U.S. v. Blaszczak, the panel made two major rulings that could have a significant impact on future insider trading prosecutions.  First, the panel held that confidential government information may be considered “property” under the Title 18 securities fraud and wire fraud statutes.  Second, the panel ruled that prosecutors in Title 18 insider trading cases do not need to show that the insider received any “personal benefit” in exchange for the material, non-public information, in contrast to longstanding Supreme Court precedent governing insider trading charges brought under Title 15 (the Securities Exchange Act of 1934).‎

David Blaszczak was a former Medicare official.  After he left the government, Blaszczak worked as a consultant, and gave tips to two analysts on changes to government reimbursement rates that he received from former colleagues who still worked for the government.  Blaszczak was charged with insider trading on multiple legal theories, including Title 15 securities fraud as well as Title 18 securities fraud and wire fraud.  After trial, he was acquitted on the Title 15 insider trading counts but convicted on the Title 18 counts.

On appeal, Blaszczak argued that the non-public information at issue (i.e., information on Medicare reimbursement rates) was not “property” for purposes of the Title 18 securities fraud and wire fraud statutes—both of which require a scheme to fraudulently obtain “money or property.”  The Second Circuit disagreed, however, holding that the government did have a proprietary right to keep the information confidential and make exclusive use of it:  “CMS’s right to exclude the public from accessing its confidential predecisional information squarely implicates the government’s role as property holder.”  Judge Amalya Kearse dissented, arguing that the information was not a “thing of value” for purposes of the Title 18 statutes because the government is not a business and does not seek to profit from the information.

Next, Blaszczak argued that prosecutors were required to prove that he received a “personal benefit” in exchange for the tip, pursuant to the U.S. Supreme Court’s 1985 decision in SEC v. Dirks.  The scope of this requirement has been the subject of significant debate in recent years, including in the Second Circuit’s U.S. v. Newman and the Supreme Court’s Salman v. U.S. decision.  It can be a critical defense in insider trading prosecutions.

In Blaszczak, however, the Second Circuit rejected the argument that the Dirks “personal benefit” test applies to Title 18 insider trading charges.  The panel explained that although the text of Title 15 and Title 18 was similar, the purposes were different.  The “personal benefit” test “is a judge-made doctrine premised on the Exchange Act’s statutory purpose,” which was to “eliminate [the] use of inside information for personal advantage.”  Title 18 securities fraud, on the other hand, ‎“was intended to provide prosecutors with a different – and broader – ‎enforcement mechanism to address securities fraud than what had been previously provided in ‎the Title 15 fraud provisions.”  As such, the panel “decline[d] to graft the Dirks personal-benefit test onto the elements ‎of Title 18 securities fraud.”

Because the “personal benefit” test does not apply to Title 18 insider trading cases, prosecutors may now be willing to charge cases that previously would not have been viable under Dirks.  At a minimum, prosecutors are more likely to charge insider trading under both Title 18 and Title 15, as they did in Blaszczak.  This will be an important topic to watch in the year ahead, both in terms of prosecutors’ charging decisions and rulings by other courts.