On January 11, 2021, the U.S. Supreme Court vacated a Second Circuit decision that had affirmed four convictions for insider trading. The Supreme Court recommended that the lower court reconsider its finding that confidential government information constitutes property under federal anti-fraud laws. In re-evaluating its decision, the Second Circuit will need to grapple with the definition of “property” in cases of securities fraud and whether prosecutors must prove that a defendant received a “personal benefit” in order to convict under the Securities and Exchange Act of 1934.
Defendant David Blaszczak worked for the Centers for Medicare & Medicaid Services (CMS) before becoming a political intelligence consultant. According to the U.S. Department of Justice (“DOJ”), between 2009 and 2014 Blaszczak and his co-defendants passed non-public, market-moving information about pending changes to CMS reimbursement rates to two hedge funds, Deerfield Management Co. and Visium Asset Management. The hedge funds went on to earn millions of dollars on trades in healthcare company securities that would be impacted by the changes once they were made public. The DOJ alleged that these actions violated the Securities and Exchange Act of 1934 (“the Exchange Act” 15 U.S.C. §78m) and Title 18 securities fraud laws. Importantly, the hedge fund managers never paid Blaszczak or the other defendants for the information that was disclosed.
On the basis of this tipping scheme, Blaszczak and his co-defendants were convicted of wire fraud, securities fraud, conversion of U.S. property, and misappropriation of confidential information from CMS in violation of Title 18 securities fraud laws. They were acquitted of charges filed under the Exchange Act.
The defendants appealed, challenging whether the information they passed constitutes “property,” which is required to convict for wire fraud and securities fraud, and arguing that the personal benefit test established in Dirks v. Securities & Exchange Commission, should also apply to the wire fraud and securities fraud offenses under Title 18.
In reconsidering Blaszczak, the Second Circuit will need to address the Supreme Court’s May 2020 decision in Kelly v. United States, the so-called “Bridgegate” case that vacated the convictions of two former New Jersey public officials who were charged with a politically motivated scheme to limit access to the George Washington Bridge. The Supreme Court found that their scheme did not constitute wire fraud because their goal was not to obtain money or property.
By recommending that the Second Circuit reconsider Blaszczak in light of Kelly, the Supreme Court appears to be expressing its disagreement with the Second Circuit’s finding that confidential information constitutes “property” in a case of securities fraud.
The Second Circuit in Blaszczak, held that the Supreme Court’s decision in Dirks v. Securities and Exchange Commission, requires that the government prove that a defendant breached a duty of trust and confidence by disclosing material, nonpublic information in exchange for a “personal benefit,” in order to convict under Title 15 §78j(b)(Exhange Act). To convict under the Exchange Act, the Dirks test requires that prosecutors prove that a defendant received a “personal benefit” in exchange for tips passed to traders.
However, the Second Circuit has found that Dirks does not apply to wire fraud and securities fraud cases brought under Title 18. This has made it easier for prosecutors to secure a conviction for insider trading as securities fraud under Title 18 rather than under the Exchange Act.
The Supreme Court’s decision in Kelly does not affect this part of the Second Circuit’s analysis in Blaszczak.
Securities fraud, insider trading or “tipping” cases are unique because insider trading laws have evolved primarily through judicial decisions rather than explicitly through statutes. As a result, the evidence necessary to prove a case of insider trading is changing as courts decide new insider trading cases.
Blaszczak will have important ramifications for defendants who are charged with securities fraud arising from insider trading schemes. On one hand, the Second Circuit encouraged prosecutors to bring insider trading cases under Title 18 securities fraud laws, thereby eliminating the need to prove a personal benefit under Dirks, which is required for tipping cases brought under the Exchange Act.
But upon reconsideration, the Second Circuit will likely need to narrow the definition of “property” in accordance with Kelly. Thus, the Second Circuit’s decision in Blaszczak could make it more difficult for prosecutors to bring cases alleging insider trading under Title 15.
If the Second Circuit somehow upholds the convictions in Blaszczak, prosecutors may be able to charge defendants with insider trading without the need to prove that the tipper received a personal benefit in exchange for the information, or even that the tippee was aware of a personal benefit received by the tipper. This could create the illogical result of subjecting defendants to criminal liability in cases where the SEC is unable to bring a civil case, which requires a lower burden of proof.
Regardless, Blaszczak has potentially broad implications for the future of prosecutions for securities fraud and insider trading.
For more than 30 years, New York City criminal defense attorney Hope Lefeber has been defending people accused of crimes in federal court. She began her career as an enforcement attorney with the Securities and Exchange Commission (SEC) where she learned first-hand how the government investigates and prosecutes insider trading cases. Today, she uses that experience to defend people who have been charged with financial crimes in federal court.
Ms. Lefeber is a fierce advocate for her clients’ rights who meticulously prepares every case she handles. She has defended executives at Fortune 500 Companies, as well as lawyers, doctors, medical professionals, professors, students, and businessmen and women who have been under investigation or charged with financial crimes.
Ms. Lefeber has earned a reputation among her colleagues in the federal bar, federal judges, and her clients as an attorney who staunchly defends her clients against the government’s attempts to convict them.
If you are under investigation or have been charged with a financial crime in federal court, contact Hope Lefeber today to schedule a confidential consultation to discuss your case.