ding statute to prosecute tipper-tippee insider trading without needing to prove that the tipper received a “personal benefit,” as required under the federal securities laws.The majority’s ruling on the use of nonpublic governmental information under insider-trading and wire-fraud statutes will likely not affect most insider-trading cases, which generally involve material nonpublic information (“MNPI”) obtained from nongovernmental sources. But the views expressed in the concurrence, if ultimately adopted by the courts or Congress, could shut down an approach that the government has been using to avoid the potentially complicated “personal benefit” issue, which has generated much litigation in recent years.BackgroundBlaszczak II marked the case’s second appearance in the Second Circuit. When court issued its first decision in BlaszczakI in December 2019, most of the attention had focused on the court’s upholding the government’s use of the criminal statute prohibiting insider trading (18U.S.C. §1348) as a way to avoid having to prove that the provider of MNPI had received a personal benefit in exchange for that information or that a tippee had known of the tipper’s receipt of a personal benefit.Insider-trading cases have traditionally been brought under the general securities-law statute prohibiting securities fraud, 15 U.S.C. §10(b) (“Title15”). An insider or other tipper cannot be held liable for securities fraud under Title15 unless he or she breached a duty of trust or confidence by using or disclosing MNPI in exchange for a personal benefit. Similarly, a tippee cannot be held liable for Title15 securities fraud unless he or she used or conveyed the MNPI knowing that it had been obtained in breach of the tipper’s duty (a standard that includes the tippee’s knowledge of the tipper’s receipt of a personal benefit).Because the personal-benefit requirement sometimes creates potential difficulties of proof, some prosecutors began to prosecute insider trading under 18 U.S.C. §1348,

In United States v. Blaszczak,the Second Circuit recently remanded a criminal conviction concerning the misappropriation of confidential information to the District Court in light of the Supreme Court’s decision in Kelly v. United States, which held that a scheme to alter “a regulatory choice is not one to appropriate the government’s property” for purposes of the wire fraud statute. The Second Circuit previously affirmed convictions against defendants David Blaszczak, Theodore Huber, Robert Olan, and Christopher Worrall for conversion of government property, 18 U.S.C. § 641, and wire fraud, 18 U.S.C. § 1343, as well as convictions against Blaszczak, Huber, and Olan of Title 18 securities fraud, 18 U.S.C. § 1348, and related conspiracy charges under 18 U.S.C. §§ 371, 1349. The convictions all stemmed from a scheme that involved misappropriating confidential information from the Centers for Medicare & Medicaid Services (“CMS”), at which certain defendants previously worked.On remand, the defendants argued, and the Government agreed, that the CMS information at issue “does not constitute ‘property’ or a ‘thing of value’ within the meaning” of the relevant statues after Kelly, such that the convictions on the substantive counts should be reversed and dismissed. The Second Circuit agreed. The Government sought affirmance on the remaining conspiracy convictions, but the Second Circuit vacated those convictions and remanded for further proceedings because the verdicts did “not reveal whether the jury found that the charged defendants conspired to engage in alleged conduct other than that which the government no longer contends was criminal.” This case is likely to have far-reaching implications for

majority opinion in United States v. Blaszczak(“Blaszczak II”), reconsidering the contours of Title 18 insider trading liability. While the decision does not come as a surprise, it does have potentially far-reaching ramifications for the government’s ability to make use of Title 18 to prosecute fraud and theft charges.Factual and Procedural BackgroundThe Blaszczak prosecution involved allegations that a political intelligence consultant received nonpublic information from the Centers for Medicare & Medicaid Services (“CMS”), a government agency, concerning planned changes to Medicare reimbursement rates for particular drugs. The consultant then shared that information with two clients, who allegedly traded in securities of companies that would be affected by CMS’s forthcoming changes.In an eighteen-count indictment, the government charged the defendants with securities fraud under Section 15 U.S.C. § 78j(b) & 78ff (the “Title 15” counts); a seldom-used theory of securities fraud under 18 U.S.C. § 1348; wire fraud under 18 U.S.C. § 1343 (the “Title 18” counts); conversion of government property under 18 U.S.C. §§ 641 & 2; and several conspiracy charges. At trial, the jury acquitted the defendants of all of the Title 15 counts, but convicted them of some of the Title 18 counts.The defendants appealed, and the Second Circuit initially affirmed the convictions in Blaszczak I, becoming one of the first appellate courts to address the scope of Title 18 insider trading liability. In doing so, it held that: (i) confidential information taken from CMS is the government’s “property” for purposes of the Title 18 statutes at issue; and (ii) unlike Title 15 jurisprudence, which requires the government to prove that the person providing the confidential information received a personal benefit, Title 18 jurisprudence does not currently impose a personal benefit requirement.Upon further appeal, the U.S. Supreme Court remanded the case for reconsideration in light of Kelly v. United States, which i

9The government charged Blaszczak, his tipper and his tippees with securities fraud under Section 10(b) of the Securities Exchange Act as well as wire fraud and securities fraud under Title 18 of the criminal code (18 U.S.C. § 1343 and § 1348, respectively), among other charges.10After a trial, the jury acquitted the defendants on the Section 10(b) charges but convicted on the Title 18 charges.11 The Second Circuit upheld the convictions on appeal.12In our prior Client Alerts discussing Blaszczak,13 we focused on the portion of the appeal that addressed the requirements for an insider trading prosecution under 18 U.S.C. § 1348, the general securities fraud statute that was added to the criminal code by the Sarbanes-Oxley Act of 2002. Most critically, the Second Circuit held that prosecutions for insider trading under Section 1348 do not require all of the same elements as prosecutions under Section 10(b).

First, the US Court of Appeals for the Second Circuit’s revised decision in United States v. Martoma3 embraced a broad theory of liability under Section 10(b) of the Securities Exchange Act and Rule 10b-5 (hereinafter, collectively, “Section 10(b)”) that prohibits a party from tipping with an “intent to benefit” the recipient. Second, when prosecutors have pursued tipping cases under 18 U.S.C. § 1348, a criminal securities fraud provision adopted as part of the Sarbanes-Oxley Act of 2002, courts have interpreted this newer securities fraud statute to have less stringent requirements than Section 10(b).These two developments could lead the government to take a more aggressive stance on tipping charges in the future, and both finance professionals and lawyers need to be aware that the ground may be shifting under them.4United States v. MartomaIn United States v. Martoma, the Second Circuit grappled with the question of whether liability under Section 10(b) attaches when a tipper passes along material nonpublic information to another person, even a casual acquaintance, who later trades on that information, and the tipper receives no apparent financial reward in return.

Insider trading has frequently been splashed across headlines in recent months, with a congressman, an NFL player, a comedy writer, and a Silicon Valley executive all facing charges.1 In the background of these headlines are two legal developments that give the government greater flexibility to successfully litigate future insider trading cases, particularly those involving tipping.2First, the US Court of Appeals for the Second Circuit’s revised decision in United States v. Martoma3 embraced a broad theory of liability under Section 10(b) of the Securities Exchange Act and Rule 10b-5 (hereinafter, collectively, “Section 10(b)”) that prohibits a party from tipping with an “intent to benefit” the recipient. Second, when prosecutors have pursued tipping cases under 18 U.S.C. § 1348, a criminal securities fraud provision adopted as part of the Sarbanes-Oxley Act of 2002, courts have interpreted this newer securities fraud statute to have less stringent requirements than Section 10(b). These two developments could lead the government to take a more aggressive stance on tipping charges in the future, and both finance professionals and lawyers need to be aware that the ground may be shifting under them.4United States v. MartomaIn United States v. Martoma, the Second Circuit grappled with the question of whether liability under Section 10(b) attaches when a tipper passes along material nonpublic information to another person, even a casual acquaintance, who later trades on that information, and the tipper receives no apparent financial reward in return.

yee, defendant Christopher Worrall, provided material nonpublic information to his friend and former CMS colleague, a political intelligence consultant named David Blaszczak.[6] Blaszczak then passed that information on to his client, Deerfield Management Company, L.P., which profitably traded on it.[7]In terms of the personal benefit element required to prove insider trading since the Supreme Court’s decision in Dirks v. SEC,[8] Blaszczak gave Worrall free meals and sports tickets as well as offering Worrall an opportunity to join his firm (which Worrall declined). Blaszczak himself was paid through his firm’s consulting arrangement with Deerfield.Procedural BackgroundOne of the notable aspects of the case was the prosecution under both Title 15 and Title 18 of the U.S. Code. While Section 10(b) of the Exchange Act (which is part of Title 15) requires a personal benefit underDirksand its progeny, it was not clear that the wire and securities fraud statutes under 18 U.S.C. §§ 1343 and 1348 did so too. And so the jury instructions at trial differed for the different charges, and the jury convicted under Title 18 but acquitted under Title 15.[9]The defendants appealed on several grounds, including (i) whether the district court erred by refusing to instruct the jury on the Dirks personal benefit element in the Title 18 counts; and (ii) whether the confidential CMS information was property or a thing of value for the purposes of the wire fraud and securities fraud statutes under Title 18.[10]On Dec. 30, 2019, in Blaszczak I, a three-judge panel of the Second Circuit voted 2-1 to affirm the convictions. Judge Richard Sullivan, writing for the majority, concluded that the district court had not erred by failing to instruct on the personal benefit requirement on the Title 18 charges and that the CMS information was indeed property.[11] Judge Amalya Kearse dissented solely on the ground of whether CMS’s pre-decisional regulatory information was property or a thing of value.[12

The government’s indictment alleged that the employees tipped David Blaszczak, a former CMS employee who was working as a political intelligence consultant at the time. Blaszczak, in turn, allegedly tipped three partners of a healthcare-focused hedge fund, which profitably traded on the information between 2009 and 2013.The government charged Blaszczak, a CMS employee, and two of the hedge fund partners with Title 15 securities fraud under Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, as well as securities fraud under 18 U.S.C. § 1348, a separate and seldom-used statute added to Title 18 by the Sarbanes-Oxley Act of 2002. (The U.S. Department of Justice (DOJ) can prosecute insider trading criminally under both the Exchange Act and Section 1348, while the SEC is limited to civil insider trading enforcement under the Exchange Act.) It also charged them with wire fraud under 18 U.S.C. § 1343.

The decision is likely to strengthen calls for insider trading legislation that would create a consistent standard (a recent bill passed by the U.S. House of Representatives would not).The Blaszczak decision is the latest in a string of recent developments that are changing the landscape for insider trading enforcement. For additional information, see our Insider Trading Law Alerts: Better The Devil You Know? Tipping Liability, Martoma and the Rise of 18 U.S.C.§1348 and Insider Trading Prohibition Act Passed by the House of Representatives.The Blaszczak Tipping Scheme and the Absence of a Dirks Personal BenefitIn Blaszczak, the government charged several individuals in a tipping scheme involving confidential predecisional information of the Center for Medicare and Medicaid Services (“CMS”). According to the indictment, David Blaszczak, a political intelligence consultant, received nonpublic, market-moving information about prospective changes to Medicare reimbursement rates from a former colleague who still worked at CMS.

Press Release, Financial Services Committee Republicans, McHenry Amendment Accepted to Improve Insider Trading Bill, Protect Good Faith Traders (Dec. 5, 2019). In recent years, in order to circumvent unfavorable caselaw imposing stricter requirements for Section 10(b) and Rule 10b-5 liability, some prosecutors have begun charging insider trading cases under 18 USC. § 1348 (2018). For a discussion of this growing trend and an analysis of the different elements of Section 1348, see a prior WilmerHale client alert: Mark D. Cahn, Elizabeth L. Mitchell & Brett T. Atanasio, Better The Devil You Know? Tipping Liability, Martoma and the Rise of 18 USC. § 1348, WilmerHale (May 14, 2019).SEC v. Dorozhko, 574 F.3d 42, 51 (2d Cir. 2009).