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Second Circuit Upholds Title 18 Insider-Trading Conviction Where Title 15 Elements Not Established
The recent decision in United States v. Blaszczak may signal a change in how prosecutors in the Second Circuit, and perhaps in other jurisdictions, pursue insider-trading cases. United States v. Blaszczak, — F.3d —-, Nos. 18-2811, 18-2825, 18-2867, 18-2878, 2019 WL 7289753 (2d Cir. Dec. 30, 2019). In Blaszczak, the United States Court of Appeals for the Second Circuit held that insider-trading under Title 18 of the U.S. Code does not involve the same "personal benefit" test the Supreme Court applied to insider-trading under Title 15 in Dirks v. SEC, 463 U.S. 646 (1983). The Blaszczak decision arguably provides the government with an avenue to avoid the Supreme Court's ruling in Dirks and could embolden prosecutors to charge defendants more aggressively with insider trading under Title 18. But while Blaszczak relieves the government of the "personal benefit" test, prosecutors will likely still have to show a defendant defrauded a victim of "property" under 18 U.S.C. §1348. This "property" requirement, which does not apply to Title 15's insider-trading provisions, may continue to limit how aggressively the government employs Title 18 to prosecute such cases.
The Blaszczak Facts
David Blaszczak, a former employee at the Centers for Medicare & Medicaid Services (CMS) turned hedge fund consultant, obtained non-public, so-called predecisional information about anticipated rule changes from sources at CMS. Blaszczak tipped this information to traders at certain hedge funds who then traded on it before CMS publicly announced the rule changes.
The government charged Blaszczak with securities fraud under both Title 15 and Title 18, among other things. In May 2018, a jury found Blaszczak guilty of securities fraud in violation of 18 U.S.C. §1348 (Title 18 securities fraud), but acquitted him of securities fraud under 15 U.S.C. §78j(b) and 17 C.F.R. §240.10b-5 (Title 15 securities fraud). He was sentenced to over twelve months imprisonment and ordered to forfeit over $700,000.
Blaszczak appealed his conviction, arguing that Dirks required the government to prove that the CMS insiders revealed non-public information to Blaszczak in exchange for a "personal benefit." In doing so, Blaszczak sought to import a longstanding requirement for Title 15 securities fraud to Title 18 securities fraud. Because the evidence failed to prove that the CMS insider disclosed non-public information to Blaszczak in exchange for a personal benefit, Blaszczak argued that he should also have been acquitted of Title 18 securities fraud.
The 'Personal Benefit' Requirement Under Dirks
Blaszczak's appeal relied largely on the Supreme Court's 1983 decision in Dirks. Robert Dirks, an investment adviser and officer of a broker-dealer, received non-public information about a potential fraud at a financial conglomerate. Dirks shared this non-public information about fraud with clients and other investors, who in turn traded on the information. After the fraud became public, the SEC brought a disciplinary proceeding against Dirks, finding that he aided and abetted Title 15 securities fraud.
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