Seventeen months after oral argument, the Second Circuit handed down its second opinion in U.S. v. Blaszczak, 56 F.4th 230 (2d Cir. 2022), an important insider trading case involving the misappropriation of governmental information. Far from resolving the issues presented in the case, however, the Second Circuit’s opinion only serves to muddy the waters for civil and criminal practitioners alike. This article examines the issues raised—and unanswered—by Blaszczak about which practitioners must be mindful.
In 2017, Daniel Blaszczak was indicted along with three co-defendants on criminal insider trading charges stemming from information obtained from the Centers of Medicare and Medicaid Services (“CMS”), a governmental unit, about upcoming Medicaid price hikes. Following a jury trial, Blaszczak was convicted of wire fraud (18 U.S.C. § 1343), securities fraud (18 U.S.C. § 1348), and conversion of government property (18 U.S.C. § 641), as well as three counts of conspiracy (18 U.S.C. § 371). Blaszczak was acquitted, however, of securities fraud charges under Title 15 (Securities Exchange Act of 1934, 15 U.S.C. § 78j(b)) and violations of Rule 10b-5 thereunder (17 C.F.R. § 240.10b-5) based on the government’s failure to prove that the tipper received a “personal benefit.”
Blaszczak appealed his conviction, arguing that the confidential information regarding rate increases obtained from CMS did not constitute “property” or a “thing of value” within the meaning of Sections 641, 1343, and 1348. The majority disagreed and affirmed the convictions. U.S. v. Blaszczak, 947 F.3d 19 (2d Cir. 2019) (“Blaszczak I”).
While Blaszczak’s petition for certiorari was pending before the Supreme Court, the Court decided Kelly v. U.S., 140 S. Ct. 1565 (2020), involving the “Bridgegate” scandal associated with the closing of several lanes of the George Washington Bridge by aides of then-Governor Chris Christie of New Jersey. According to the Court, the act of closing the traffic lanes constituted an exercise of the government’s rights of “allocation, exclusion and control,” but that exercise did not convert the Bridge lanes into “government property” within the meaning of Title 18.
In the wake of Kelly, the U.S. Solicitor General filed a brief with the Supreme Court confessing error in Blaszczak. According to the Solicitor General, information of the type considered in Kelly “typically must have economic value in the hands of the relevant government entity to constitute ‘property’” under Title 18, and the confidential information in Blaszczak did not constitute property. In response, the Supreme Court granted certiorari, vacated the Second Circuit’s decision in Blaszczak I, and remanded the case for further consideration in light of Kelly.
On remand, a panel of the Second Circuit held 2-1 that CMS’s confidential information was “regulatory in character” and therefore did not constitute “property” for the purposes of securities or wire fraud under Title 18. Blaszczak II, 56 F.4th at 244. Accordingly, it dismissed the charges under Sections 641, 1343, and 1348. It did so in part based on its conclusion that the information belonging to the government – the release date of rate hikes – was not its “stock in trade,” unlike the pre-publication information misappropriated from the Wall Street Journal in Carpenter v. U.S., 484 U.S. 19 (1987). However, because the jury verdict did not reveal which of the goals of the conspiracy had been proven by the government, Blaszczak’s conspiracy convictions were vacated, and the case was remanded to the district court for retrial by a jury. That case is still pending.
If matters were not complicated enough, Judge John Walker entered a concurring opinion and Judge Richard Sullivan issued a dissent in Blaszczak II, both of which raise issues not addressed or resolved by the majority.
Judge Walker concurred in the majority’s opinion yet wrote separately regarding a “glaring anomaly” created by the decision, namely, that the panel’s interpretation of the property-related Title 18 criminal statutes at issue in Blaszczak required proof of fewer elements than a civil case would for securities fraud under Title 15. That is because a civil prosecution under Section 10(b) requires proof of a “personal benefit” to the tipper, while a criminal prosecution under Sections 641, 1343, and 1348 does not. This struck Judge Walker as “odd” and interjected a totally new issue into Second Circuit insider trading law.
Judge Sullivan, the author of the majority opinion in Blaszczak I, issued a vigorous 35-page dissent in which he criticized the majority for its conclusion that the misappropriated confidential information was “regulatory in character” and therefore did not constitute “property” for the purposes of securities or wire fraud under Title 18. In support of his position, Judge Sullivan noted that neither of the criminal securities fraud or wire fraud statutes makes any distinction between “tangible” and “intangible” property or between information in possession of the government and information in possession of a private entity. He felt such a conclusion was neither required or warranted by the intervening Kelly decision and “would give fraudsters carte blanche to misappropriate the ‘confidential information’ of any and every ‘regulatory agency.’”
One clear impact of the majority opinion in Blaszczak is the difficulty the government will encounter going forward on Title 18 prosecutions involving the theft of government information. While prosecutors may still be able to bring insider trading charges under Title 15, they will be required to prove a “personal benefit to the tipper,” something the government was unable to do at trial in Blaszczak. As Judge Walker’s concurrence emphasizes, prosecutors may now be incentivized to bring more insider trading cases as criminal actions, rather than civil, given the fewer elements of proof required to obtain a conviction.
Indeed, the dichotomies apparently drawn by the majority in Blaszczak II between (i) government property and private property, and (ii) intangible and tangible property, has deep implications for government prosecutions alleging the use or misuse of government property well beyond the statutes and scenarios involved in Blaszczak. Title 18 is replete with property-based offenses involving or relating to government property that may be affected by Blaszczak. Will each of these property-related offenses need to be litigated on an offense-by-offense basis? Will other circuits adopt the Second Circuit’s approach? The potential for conflicting interpretations seems high. Finally, the majority’s reference to information needing to be an entity’s “stock in trade” to constitute “property” has grave implications for a host of other commercial scenarios involving such things as internal earnings analyses, pending transactions, management changes, or internal projections. Query whether such “intangible” types of information–even in a commercial setting–have sufficient “worth” to constitute property for criminal prosecutions.
Four things are clear: first, defense counsel should pay careful attention to what constitutes “property” in any case involving the alleged misappropriation or improper use of company information. Second, counsel should be on the lookout for an uptick in criminal insider trading prosecutions, in place of civil actions. Third, counsel unfamiliar with the criminal arena should consult or align themselves with experienced criminal counsel. And fourth, the questions raised in Blaszczak II will likely be litigated for some time to come.
Postscript: On July 24, 2023, six years after Blaszczak was indicted, DOJ filed a deferred prosecution agreement functionally dismissing the remaining conspiracy charges against him.