Since the Supreme Court's May 2020 decision in the 'Bridgegate' case (United States v Kelly), the scope of the decision's impact on federal white collar criminal prosecution has been an open question. The potential implications for insider trading prosecutions were made clear on 11 January 2021 in United States v Blaszczak, with the Supreme Court vacating a 2020 decision by the US Court of Appeals for the Second Circuit that had affirmed four insider trading convictions. By remanding the case in light of Kelly, the Supreme Court will require the Second Circuit to re-examine whether confidential government information may be considered property under federal anti-fraud statutes. The outcome of this could have a lasting impact on insider trading and other criminal prosecutions which implicate government property.
The case of United States v Blaszczak involved a now former employee of the Centres for Medicare and Medicaid Services (CMS) who had allegedly disclosed confidential pre-decisional information on Medicare reimbursement rates to his friend and former CMS colleague, David Blaszczak. Blaszczak, a political intelligence consultant, passed the information to two hedge fund analysts who then profitably traded on the information.
Following an original indictment in May 2017, an 18-count superseding indictment dated March 2018 charged Blaszczak and other defendants with, among other things, securities fraud under both Title 15 and Title 18 of the United States Code as well as wire fraud under Title 18 thereof. In April 2018 a jury returned a split verdict, acquitting the defendants of the Title 15 charges but convicting them of wire fraud, conversion and Title 18 securities fraud in connection with their scheme to defraud CMS by misappropriating the agency's confidential information.
The Second Circuit affirmed the convictions. One key issue related to whether the personal benefit test set out in Dirks v SEC applies to Title 18 fraud statutes. It is well established that proof of securities fraud under Title 15 requires the government to show that the tipper breached a duty of trust and confidence by disclosing confidential information to gain a direct or indirect personal benefit. The tippee must also have been aware that the tipper had breached this duty to provide the tippee with said information. However, in Blaszczak, the Second Circuit concluded that the Dirks personal benefit test did not apply in the context of Title 18, thereby expanding the basis for Title 18 liability.
The Second Circuit's holding that CMS confidential information "may constitute 'property' for the purposes of wire fraud and Title 18 securities fraud" also created additional potential criminal exposure for those privy to confidential government information. The court afforded "the same meaning to the word 'property' in both the wire fraud and Title 18 securities fraud statutes" – namely, 'something of value' in the possession of the property holder (in this context, the fraud victim). The Second Circuit examined two prior Supreme Court decisions:
- Carpenter v United States [484 US 19 (1987)] – in which the court held that the Wall Street Journal's publication schedule and content of unpublished articles constituted property because the journal had had a "property right in keeping confidential and making exclusive use of the information before publication"; and
- Cleveland v United States [531 US 12 (2000)] – in which the court found that the fraudulent video poker licences at issue did not constitute property because granting video poker licences was a "regulatory" concern.
In Blaszczak, the Second Circuit found it "most significant" that CMS had had a right to exclude akin to the proprietary right in Carpenter. The court emphasised that the right to exclude was "crucial in defining property in Carpenter". Further, the court highlighted that, consistent with Carpenter, monetary loss is not required when defining property or a scheme to defraud under the Title 18 anti-fraud statutes; it is exclusivity which creates the property interest.
In its May 2020 decision in Kelly v United States, the Supreme Court held that Title 18 fraud requires a scheme to obtain property, rather than interfere with a governmental function. In Kelly, the court unanimously reversed the federal fraud convictions of two former New Jersey public officials involved in the high-profile Bridgegate scandal.(1) The Supreme Court found that a politically motivated scheme to limit access to the George Washington Bridge was an "exercise of regulatory power" that "fail[ed] to meet the statutes' property requirement". The court observed that "the employees' labor was just the incidental cost of that regulation, rather than itself an object of the officials' scheme".
The Kelly ruling, which reaffirmed the finding in Cleveland, led the Blaszczak defendants to challenge their convictions under Title 18's wire and securities fraud statutes. In September 2020 three defendants filed a petition for certiorari, arguing that the Second Circuit had erred in withholding the personal benefit requirement for the wire fraud and Title 18 securities fraud charges and in concluding that the confidential information at issue amounted to government property. In response to the certiorari petition, the government proposed that the Supreme Court vacate the Second Circuit's decision and remand for further consideration in light of Kelly – precisely the path taken by the Supreme Court.
How the Supreme Court's decisions in Kelly and Blaszczak will affect the scope of liability in insider trading cases remains to be seen. The Supreme Court's action in Blaszczak signals potential disagreement with the Second Circuit's definition of property in Title 18 fraud cases. If the Second Circuit follows Kelly and concludes that confidential government information does not constitute property, there is a strong likelihood that the Blaszczak defendants' federal fraud convictions will be reversed.
The Supreme Court did not address the Second Circuit's finding that the personal benefit requirement in Title 15 does not apply to Title 18 insider trading prosecutions. Prosecutors may interpret the court's silence as permission to proceed with insider trading indictments under Title 18 to avoid having to prove that the tipper obtained a personal benefit. This approach could increase the number of cases and substantially expand criminal liability.
A reversal of the Blaszczak convictions by the Second Circuit could in turn influence other fraud cases. A possible case which may have the fraud convictions overturned is United States v Middendorf, in which Public Company Accounting Oversight Board inspectors were alleged to have shared confidential audit lists with employees of an accounting firm. The defendants' reply briefs to the Second Circuit relied heavily on the Kelly decision and tried to distinguish the Second Circuit's initial holding in Blaszczak. The defendants argued that lists of planned audit inspections were not property under the wire fraud statute because these lists were prepared and used to regulate the public company auditing profession.
As these cases reflect, the scope of insider trading liability has been, and remains, in a state of flux. In addition to some uncertainty surrounding the applicability of the personal benefit test under Title 18, the Second Circuit has now been left to re-evaluate the definition of property for purposes of Title 18 wire and securities fraud cases. Accordingly, time will tell whether Kelly will, in an insider trading context, mark a pendulum shift towards a narrowing of criminal liability, just one year after the Second Circuit's Blaszczak decision appeared to do the opposite.
Endnotes
(1) For more information please see here.
