After the Circuit’s original decision (in 2019) affirmed the fraud and conversion convictions of the four defendants (over a dissent by Judge Kearse), the Supreme Court granted cert., vacated the judgment, and “remanded for further consideration, in light of Kelly v. United States, ––– U.S. ––––, 140 S. Ct. 1565 (2020).” See United States v. Blaszczak, 947 F.3d 19 (2d Cir. 2019), vacated and remanded, 141 S. Ct. 1040 (2021).
In light of Kelly, the Department of Justice “‘determined that the confidential information at issue in [Blaszczak] does not constitute ‘property’ or a ‘thing of value’ under the relevant statutes’” — 18 U.S.C. §§ 1343, 1348, and 641 — so, the convictions on the substantive counts of fraud and conversion should be dismissed. See Blaszczak, 2022 WL 17926047 at *4 (quoting the Government’s brief on remand). However, the government argued that two conspiracy convictions should be affirmed on the theory that an alternative object of each conspiracy — a general conspiracy to defraud the U.S. — was still valid.
On remand, the Second Circuit, in a 2-1 decision by Judge Kearse (who dissented in the original 2019 Blaszczak decision), granted the government’s request to remand the cases to the district court for dismissal of the convictions on the substantive fraud and conversion counts based on Kelly and on “the prosecutorial discretion to which the Executive Branch of the government is entitled.” The Circuit majority also vacated the convictions on the conspiracy counts — rejecting the government’s argument that those convictions remained valid — and remanded for further proceedings. Blaszczak, 2022 WL 17926047 at *1. Judge Sullivan dissents.
The underlying conduct
The four defendants in this case were prosecuted for allegedly “misappropriati[ng] … confidential information from the Centers for Medicare & Medicaid Services (‘CMS’)[,]” and trading on it. Blaszczak, 2022 WL 17926047 at *1. CMS is the federal agency that “administers Medicare and Medicaid, including inter alia, issuing rules setting reimbursement rates for healthcare providers.” These reimbursement rates “may impact the stock prices of companies that offer products and services covered by th[ose] rates.” Blaszczak, id. at *1.
Prosecutors charged that a CMS employee disclosed to Blaszczak — a consultant for hedge funds — confidential information about the timing and content of the “rule changes” (reductions) that CMS would be making to “reimbursement rates” before any public announcement about rate changes. Blaszczak, id. at *2. Blaszczak then conveyed this nonpublic information to two partners in a hedge fund, who “engaged in profitable short sales” of the stocks of companies “that would be negatively affected by reimbursement rate reductions when they became effective.” Id. The CMS employee, Blaszczak, and the two hedge fund partners were prosecuted.
Although the government charged the defendants with traditional “insider trading” securities fraud, in violation of Title 15 (i.e., “15 U.S.C. § 78j(b) and 78ff, and 17 C.F.R. § 240.10b-5″), “the jury acquitted all of the defendants on all substantive counts of Title 15 securities fraud.” Blaszczak, id. at *2. But they were convicted of some combination of wire fraud, conversion of government property, and Title 18 securities fraud — in violation of 18 U.S.C. §§ 1343, 641, and 1348, respectively — and of conspiracies in violation of 18 U.S.C. § 371 to convert government property and defraud the United States. See Blaszczak, id. at *2.
The Second Circuit’s original opinion in Blaszczak, back in 2019
“On appeal, defendants challenged their convictions on the principal ground that §§ 1343 and 1348 apply to fraudulent schemes to obtain ‘money or property’ and that § 641 applies to conversion of ‘money[ ] or [a] thing of value’ of the government[.]” But CMS’s confidential information “as to its plans for announcing changes in medical service reimbursement rates was not government ‘property’ or a ‘thing of value’ within the meaning of those statutes.” Blaszczak, id. at *2. The majority in the original 2019 Blaszczak decision disagreed, and the convictions were affirmed. Id. at *2.
When the original opinion was issued in Blaszczak (in December 2019), much attention focused on the Circuit’s upholding the government’s use of Title 18 fraud statutes to prosecute insider trading cases as a way to avoid the necessity of proving certain essential elements of an insider-trading offense under Title 15: elements such as, (1) whether the “tipper” (here, the CMS employee) owed and breached any duty of trust or confidence to the government agency; (2) whether the tipper received a “personal benefit” for doing so; and (3) whether the “tippee” defendants knew of the tipper’s breach of duty and receipt of a personal benefit. See supra, Blog entry of Jan. 2, 2020, “Circuit Panel Affirms Fraud Convictions, Over Dissent” (discussing United States v. Blaszczak, No. 18-2811 (2d Cir. Dec. 30, 2019)).
The Blaszczak prosecution highlighted this problem because, “[a]t its core, this was a case about insider trading” because “the actual and intended victims of the alleged frauds would have been investors in the market for securities of the companies … affected by the regulations promulgated by CMS.” Blaszczak, id. at *10. But the government was unable to prove the elements of any of the Title 15 insider trading counts to the jury’s satisfaction, and it acquitted the defendants of those counts.
Nevertheless, in its original 2019 decision (a 2-1 opinion by Judge Sullivan), the Circuit affirmed the defendants’ convictions (of the Title 18 fraud counts) on two grounds. First, it held that the personal-benefit test required for Title 15 insider-trading securities fraud doesn’t apply to Title 18 securities fraud under § 1348 – or to wire fraud under 18 U.S.C. § 1343. And second, it held that “confidential government information may constitute government ‘property’” for purposes of the Title 18 wire-fraud and securities-fraud statutes. Judge Kearse dissented, stating that CMS’s pre-decisional regulatory information wasn’t “property” or a “thing of value” under Title 18. See United States v. Blaszczak, 947 F.3d 19 (2d Cir. 2019).
The Supreme Court decided Kelly shortly afterward, and the defendants in Blaszczak petitioned the Supreme Court for certiorari based, inter alia, on Kelly.
The Supreme Court’s Kelly decision (in 2020)
Kelly resulted from a political scandal in New Jersey popularly known as “Bridgegate” that “involved politically motivated conduct by officials in the administration of New Jersey’s then-Governor Chris Christie to cause significant traffic gridlock for several days in Fort Lee, New Jersey[.]” Blaszczak, id. at *2. Supposedly, in retaliation for the Mayor of Fort Lee’s refusal to endorse the Governor’s reelection, the Deputy Chief of Staff for the Governor worked with the Port Authority’s Deputy Executive Director (and others) to fabricate a “traffic study” that would involve closing critical Fort Lee access lanes to the George Washington Bridge, thereby causing traffic to back up and create chaos in the city of Fort Lee.
The government prosecuted the Deputy Chief of Staff and the Port Authority’s Deputy Executive Director on charges of wire fraud (18 U.S.C. § 1343); fraud on a federally funded program or entity (the Port Authority) (18 U.S.C. § 666(a)(1)(A)); and conspiracy to commit those two crimes. Blaszczak, id. at *3. After the defendants were convicted and their convictions were affirmed on appeal, the Supreme Court reversed.
The Second Circuit majority (in the current Blaszczak decision) discusses Kelly in detail. It notes that Kelly held that “the defendants’ conduct did not fall within the scope of § 1343 or § 666(a)(1) (A) because their scheme did not aim to deprive the Port Authority of money or property…. [F]ederal fraud statutes are ‘limited in scope to the protection of property rights,’ and do not ‘criminaliz[e] all acts of dishonesty[.]’” Blaszczak, 2022 WL 17926047 at *3 (quoting Kelly, 140 S. Ct. at 1571). “Thus, the government was required to prove, inter alia, that the object of the defendants’ fraud was money or property.” Id. (citing Kelly, id. at 1571-72).
But the Kelly defendants weren’t seeking the money or property of the Port Authority. “Instead, … the Kelly defendants, by deciding the distribution of lanes for drivers on the toll road, had exercised the government’s regulatory rights of ‘allocation, exclusion, and control.’” “Such regulatory rights ‘do not create a property interest,’” however. “[A]nd thus ‘a scheme to alter such a regulatory choice is not one to appropriate [the Port Authority’s] property.’” Blaszczak, id. at *3 (quoting Kelly, id. at 1572, 1573). Because the object of the defendants’ scheme “was clearly to alter ‘a regulatory decision about the toll plaza’s use’ for political retaliation, rather than to take the lanes from the government or to convert them to non-public use, the lanes as property played no more than a ‘bit part in [the] scheme.’” Blaszczak, id. at *3 (quoting Kelly, id. at 1573).
In other words, the object of the Kelly defendants’ scheme “was neither to deprive the Port Authority of its money or property nor to utilize for defendants’ own purposes that agency’s employees’ paid time, but rather to reallocate the Bridge’s access lanes.” Blaszczak, id. at *10 (quoting Kelly, 140 S. Ct. at 1572).
The Second Circuit’s decision on remand
On remand, a two-member majority of the Second Circuit concluded that “in light of Kelly, §§ 1343, 1348, 641 do not apply to the conduct that was at issue here” because CMS’s confidential information is not property. Blaszczak, id. at *10.
As noted, “[a]t its core, this was a case about insider trading – an act already understood to be wrongful under [Title 15]” — because “the actual and intended victims of the alleged frauds would have been investors in the market for securities of the companies whose fortunes would be affected by the regulations promulgated by CMS.” Blaszczak, id. at *10. But the jury acquitted the four Blaszczak defendants on all of the Title 15, insider-trading counts. “[A]nd in the remaining substantive counts at issue here, on which the jury convicted –- the fraud sections, §§ 1343 and 1348, and the section prohibiting ‘conver[sion]’ of ‘money,’ or a ‘thing of value’ from ‘the United States or any department or agency thereof,’ 18 U.S.C. § 641 – the purported victim would have been the government agency CMS.” Id. at *10. Thus, defendants “could not properly be convicted of violating §§ 1343, 1348, or 641 unless the objective of their schemes and conduct was money or property of CMS.” Id.
But CMS’s confidential information (about prospective rate changes) isn’t property. “CMS is not a commercial entity; it does not sell, or offer for sale, a service or a product.” Blaszczak, id. at *11. Although CMS seeks to keep confidential its plans to amend its regulations, “a planned CMS regulation, even if disclosed to outsiders prematurely, remains within the exclusive control of CMS. And if it is prematurely disclosed to others, the disclosure has no direct impact on the government’s fisc, although it might well impact CMS’s subsequent regulatory choices. CMS can adhere to its planned regulation, or it can alter or abandon it; it can publish the regulation at the time it had planned, or it can postpone or advance the announcement or the regulation’s effective date.” Id.
Thus, the Circuit majority concluded, “merely obtaining advance information as to what the agency’s preferred regulation would be, and when it would be announced, cannot properly be considered the agency’s money or property or a thing of value that could be ‘convert[ed].’” Blaszczak, id. at *12. “[T]he government’s right to determine ‘who should get a benefit and who should not … do[es] not create a property interest.’” Id. at *11 (ellipsis and brackets in original) (quoting Kelly, id. at 1572). The information “reflecting such a decision and the timing of that disclosure are regulatory in character and do not constitute money or property of the victim; and they are not a ‘thing of value’ to CMS that is susceptible to being ‘convert[ed],’ 18 U.S.C. § 641.” Blaszczak, id. at *11.
In addition, after the Supreme Court’s remand, the government “confesse[d] error as to th[e] substantive counts [of Title 18 securities-fraud, wire-fraud, and conversion] and as to a conspiracy count premised only on crimes concerning ‘property’[.]” “[A]nd it agree[d] that either the defendants’ convictions on those counts should be reversed, or the cases should be remanded to the district court so that the government can dismiss those counts pursuant to Fed. R. Crim. P. 48(a)[.]” Blaszczak, id. at *1. The Circuit majority spends several pages explaining the “broad discretion” that rests with the executive to decide whether to prosecute, or not prosecute, under federal criminal statutes. Blaszczak, id. at *1, *5-*10.
Judge Walker — who wasn’t on the original Panel, see 947 F.3d 19 — concurred (joined by Judge Kearse) to discuss of another part of the holding in the original (2019) Blaszczak decision (947 F.3d 19): its holding that criminal liability for “tipper-tippee insider trading” can be established under § 1348 (of Title 18) without proof that the tipper breached a duty of trust and received a personal benefit, even though criminal and civil liability for Title 15 securities fraud would require such proof. See Blaszczak, 2022 WL 17926047 at *13-*16. That difference struck Judges Walker and Kearse as “odd” because “traditional notions of fair play are offended by the present incongruence in this circuit between civil and criminal deterrence.” Id. at *13. “It should not require fewer elements to prove a criminal conviction than to impose civil penalties for the same conduct. This asymmetry deserves the further attention of our court, the Supreme Court, and Congress.” Id.
Judge Sullivan, who authored the majority opinion in the original (2019) Blaszczak decision, dissented. First, he did not read Kelly as altering the conclusion that nonpublic CMS information was “property” for purposes of § 1348 and the wire-fraud statute. Second, he did not agree that the government’s decision to dismiss the substantive counts and its post-Kelly view that the defendants’ conduct didn’t violate the relevant Title 18 fraud and conversion statutes, were entitled to deference. Blaszczak, id. at *23-*24. Third, he objected to the concurrence’s “gratuitous advisory opinion” on whether § 1348 requires a “personal benefit.” Judge Sullivan opined that the personal-benefit test under Title 15 “is a judge-made rule premised on the statutory purpose of the Securities Exchange Act,” and he saw “no obvious reason to extend that rule to a different statutory provision under Title 18.” Blaszczak, id. at *17, *27.
The Supreme Court vacated the original (2019) decision in Blaszczak. See Blaszczak v. United States, 141 S. Ct. 1040 (2021). (“Judgment vacated” in 947 F.3d 19). So is its holding that the breach-of-trust and personal-benefit elements of Title 15 insider trading don’t apply to Title 18 fraud statutes, still good law? Practitioners shouldn’t accept that it is, but argue there isn’t authority in this Circuit for a “tipper-tippee insider trading” prosecution under Title 18 without the breach-of-trust and personal-benefit elements.
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