In an opinion expanding the scope of federal criminal liability for “insider trading,” a two-Member majority of the Second Circuit affirmed several securities and fraud convictions in United States v. Blaszczak, 18-2811 (2d Cir. Dec. 30, 2019). Judge Kearse dissented from the decision.
This multi-defendant case involved a so-called expert services network: defendant Blaszczak was a political intelligence consultant, who provided clients with information about contemplated rule changes by the Centers for Medicare and Medicaid Services (CMS), a government agency. Prosecutors charged that a CMS employee disclosed confidential agency information to Blaszczak (ahead of announcements of rule changes), who in turn shared this information with employees at hedge funds. The CMS employee, Blaszczak, and two hedge-fund employees were charged.
Although this high-profile prosecution was presented as an “insider trading” case, the defendants were acquitted of all of the traditional insider trading charges (the Title 15 offenses). However they were convicted of wire fraud, conversion, and Title 18 securities fraud, in violation of 18 U.S.C. §§ 1343, 641, and 1348, respectively— counts that were charged to the jury without the insider trading elements of breach of a duty of confidence in exchange for a personal benefit.
In upholding these convictions against various challenges, the panel, in a two-Member opinion authored by Judge Sullivan, held, among other things, that (i) “confidential government information” is property for purposes of the Title 18 fraud statutes, and (ii) the “personal benefit” test established in Dirks v. SEC does not apply to these fraud statutes.
This first holding seems to contradict the reasoning of the Supreme Court’s decision in Cleveland v. United States, 531 U.S. 12 (2000), that a government video poker license was not property for purposes of the federal fraud statute (and to ignore distinctions between private corporate property holders and government agencies engaged in public affairs). But the two-Member majority assures us that while it recognizes that “Cleveland remains good law,” the case should not be applied “expansively.” It proceeds to base its opinion on several “pre-Cleveland decisions from this and other Circuits.”
In dissent, Judge Kearse takes issue with the majority’s claim that CMS’s information is “property” for purposes of the federal fraud statutes: “CMS is not a business; it does not sell, or offer for sale, a service or a product; it is a regulatory agency. … While CMS seeks to maintain confidentiality as to its planned regulations … I do not view a planned CMS regulation as a ‘thing of value’ to CMS ….” Instead, Judge Kearse finds this information precisely akin to the “gaming licenses in question in Cleveland, which the State [also] had the right to control or withhold,” but which the Supreme Court found were not “property” for purposes of the federal fraud statute.
The second way in which the two-Member panel endorses a seemingly unprecedented expansion of federal criminal liability is its finding that the Dirks personal benefit test does not apply to Title 18 securities fraud. This is a confusing holding. As the Supreme Court recognized in Dirks v. SEC, and reaffirmed more recently in Salman v. United States, 137 S. Ct. 420 (2016), disclosing or trading on material, nonpublic information is not always a “fraud,” because it does not necessarily involve any sort of manipulation or deception. Instead, it is only a “fraud” under the theory that a fiduciary or agent who owes duties of loyalty and confidentiality to some source of nonpublic information perpetrates a fraud on that source when he converts the entrusted nonpublic information in exchange for his own personal benefit. In other words, it is only a fraud when the tipper receives a personal benefit (and the remote tippees must know about the personal benefit that to be liable themselves).
In declining to require the insider trading elements of Title 15 securities fraud for Title 18 securities fraud based on insider trading conduct, the two-Member majority does not explain how trading on nonpublic information, or transferring nonpublic information to another—the factual allegations against the defendants here—still somehow constitutes a “fraud,” as should be required for criminal liability under 18 U.S.C. §§ 1343 and 1348.