In a significant win for federal prosecutors, a recent ruling in the Second Circuit makes it easier for the US government to bring criminal insider trading cases. In United States v. Blaszczak, No. 18-2811 (2d Cir. Dec. 30, 2019), the court declined to apply the same elements for imposing civil liability for insider trading under Title 15 to criminal securities fraud cases prosecuted under 18 U.S.C. § 1348. This decision may embolden federal prosecutors and make the Department of Justice (“DOJ”) more likely to prosecute securities fraud using its Title 18 authority. Interestingly, this also means the Securities and Exchange Commission (“SEC”) and the DOJ may now face different requirements for bringing insider trading cases. The SEC is currently required to prove more complex elements to impose civil liability under Title 15 than the DOJ must prove to impose criminal liability under Title 18. This discrepancy may be mitigated somewhat by the higher burden of proof in criminal cases, but the result in Blaszczak indicates that the difference could be significant for individuals facing criminal insider trading charges under 18 U.S.C. § 1348.
In this case, the government alleged a scheme in which Blaszczak, a political intelligence consultant and former Centers for Medicare & Medicaid Services (“CMS”) employee, received nonpublic information on pending agency regulations from a friend who was an active CMS employee. Blaszczak then provided that information to executives of a hedge fund which traded on the nonpublic information. In connection with this scheme, Blaszczak, the CMS employee and the hedge fund executives were charged with multiple offenses including securities fraud under 18 U.S.C. § 1348 and securities fraud under 15 U.S.C § 78j(b). At trial, all of the defendants were acquitted of the Title 15 charges but, with the exception of the CMS employee, were convicted of Title 18 criminal securities fraud. The defendants were fined and received sentences ranging from 12–36 months in prison.
On appeal, the defendants argued that the elements of insider trading should be consistent across Title 15 and Title 18. Specifically, the defendants argued that the personal-benefit requirement outlined in Dirks v. SEC, 463 U.S. 646 (1983) should apply to Title 18 securities fraud. Under Dirks, the government must prove the tipper breached a duty of trust and confidence by disclosing material, nonpublic information in exchange for a “personal benefit.”The majority rejected this argument, affirming the decision below, on the basis that the personal-benefit requirement is inconsistent with the purpose of 18 U.S.C. § 1348 and Congress’s intent through that statute to provide the government with a different and broader mechanism for prosecuting securities fraud than that provided by Title 15. As a result, it is easier for the DOJ to meet the requirements to impose criminal liability for insider trading under Title 18 than under Title 15.
Judge Amalya Kearse dissented on the ground that pre-disclosure governmental information about pending regulations was not “property” for purposes of the fraud statutes but did not address the Dirks application question. The Second Circuit’s decision may not be the final word on this issue. Due to the significance of the ruling in Blaszczak,it is possible that the decision will be reviewed by the Second Circuit en banc or by the Supreme Court. Moreover, until any such appeals are decided, the government may be reluctant to rely solely on 18 U.S.C. § 1348 and Blaszczak when prosecuting insider trading cases.
The full opinion can be found here.