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Supreme Court Vacates And Remands Blaszczak Insider Trading Decision, Providing Opportunity For Further Clarity By Second Circuit
01/26/2021On January 11, 2021, the Supreme Court vacated the Second Circuit’s decision in United States v. Blaszczak, 947 F.3d 19 (2d Cir. 2019), remanding the case to the Second Circuit for consideration in light of the Court’s decision in Kelly v. United States, 140 S. Ct. 1565 (2020). In Kelly, the Supreme Court overturned the convictions of two New Jersey public officials in the Bridgegate scandal, holding that while the conduct at issue may have constituted an abuse of power, it did not amount to a violation of either the federal wire fraud statute or a violation of the federal program fraud statute because the object of the scheme was the implementation of a regulatory object, rather than to obtain money or property. This may lead the Second Circuit to reverse or at least modify its December 2019 decision affirming convictions in Blaszczak, a decision that caused concern over its potentially significant expansion of insider trading liability.
In Blaszczak, the Second Circuit upheld the convictions of David Blaszczak and three others indicted and found guilty of alleged participation in an insider trading scheme that disclosed confidential information relating to planned changes to medical treatment reimbursement rates by the Center for Medicare & Medicaid Services (“CMS”). This decision significantly increased the risk of potential criminal insider trading liability in cases where there was limited evidence of any personal benefit to the tipper, as well as in cases involving disclosure of nonpublic government information. The Second Circuit had reasoned that, although the “personal benefit” requirement had been well-established as a required element for insider trading liability under Title 15 of the United States Code since Dirks v. SEC, 463 U.S. 646 (1983), and United States v. Newman, 773 F.3d 438, 452 (2d Cir. 2014), it did not apply to insider trading cases brought under Title 18 of the United States Code. Specifically, the Second Circuit found that for insider trading cases brought under either the wire fraud statute, 18 U.S.C. § 1343, or the securities fraud statute added to Title 18 as part of the Sarbanes-Oxley Act in 2002, 18 U.S.C. § 1348, no “personal benefit” requirement applied. And the Second Circuit further found that information about an upcoming regulatory decision could be “property” under the conversion statute, 18 U.S.C. § 641. Each of these decisions had a significant impact, particularly in insider trading cases predicated on a misappropriation theory and in the context of government employees. Indeed, taken together, they raised the question of whether virtually any type of misappropriation of government information leading to the purchase or sale of securities would trigger insider trading liability.
In May 2020, however, the Supreme Court reversed the federal-program and wire fraud convictions of two Bridgegate defendants. While the Bridgegate case did not involve insider trading, it did involve federal wire fraud—one of the three statutes at issue in Blaszczak—and more broadly implicated questions of what constitutes “property” in the context of regulatory action. The two defendants had been found guilty of these charges arising out of their alleged involvement in a scheme to limit the number of lanes in Fort Lee, New Jersey, accessing the George Washington Bridge as political retribution against the city’s mayor. Because the government was required to show that “an object of their fraud was money or property,” the Supreme Court reversed the convictions, holding that “[t]he realignment of the toll lanes was an exercise of regulatory power—something this Court has already held fails to meet the statutes’ property requirement. And the [traffic engineers’ and toll collectors’] labor was just the incidental cost of that regulation, rather than itself an object of the officials’ scheme.”
In light of the Court’s ruling in Kelly, two of the defendants convicted in Blaszczak petitioned the Supreme Court for a writ of certiorari, arguing that the Second Circuit had improperly expanded criminal insider trading liability by holding that there was no “personal benefit” requirement in Title 18 insider trading cases, and by holding that confidential information constituted government property. See Petition for a Writ of Certiorari, Olan v. United States, 2020 WL 5439755 (Sept. 4, 2020).
In response, the government, rather than addressing the merits of the issue, argued that “the appropriate course is to grant the petitions for writs of certiorari, vacate the decision below, and remand the case for further consideration in light of Kelly.” Mem. for the United States, Blaszczak v. United States (Nov. 24, 2020). The Supreme Court agreed with this course of action, granting certiorari and holding that “[t]he judgment is vacated, and the case is remanded to the … Second Circuit for further consideration in light of Kelly.” Blaszczak v. United States, 2021 WL 78043 (Jan. 11, 2021).
It is unclear how the Second Circuit will choose to readdress Blaszczak in light of the Court’s ruling in Kelly. For instance, the Second Circuit could issue a narrower ruling and avoid readdressing its prior holding that there is no personal benefit requirement in Title 18 insider trader cases by simply holding that confidential government information does not constitute property. That may be a benefit to the Blaszczak defendants (particularly in the context of their § 641 convictions), but would have limited impact on the broader implications of the decision. Alternatively, the Second Circuit may take the opportunity to reconsider whether, in light of Kelly, a narrower approach to Title 18 securities fraud is warranted as well. Blaszczak was a split decision, and one of the two judges in the majority (Judge Christopher Droney) has since retired, making it particularly difficult to predict the outcome. But regardless of the Second Circuit’s ultimate ruling, it will almost certainly be important for the future of insider trading liability.
