Earlier this month, the Supreme Court vacated and remanded a high-profile insider trading case, United States v. Blaszczak, to the Second Circuit “for further consideration in light of Kelly v. United States.” Kelly is more commonly known as the “Bridgegate” decision, in which the Supreme Court restricted the application of federal fraud statutes to schemes seeking to obtain property, to the exclusion of schemes primarily targeting regulatory actions by government officials. In light of the remand, the Second Circuit will now reconsider its endorsement in Blaszczak of liability under Title 18 for a scheme targeting “political intelligence.”
As discussed in prior alert memos, in Blaszczak, the Second Circuit made it easier to prosecute tippee insider trading cases under Title 18’s federal wire and mail fraud statutes (§§ 1341, 1343) and securities fraud statute (§ 1348), as compared to the Title 15’s securities fraud provisions. David Blaszczak was a “political intelligence” consultant who, through former colleagues at a government agency, the Centers for Medicare & Medicaid Services (“CMS”), learned of forthcoming changes in Medicare and Medicaid reimbursement rates for particular medical procedures. He shared this confidential information with hedge funds that then traded on the information before it became public, making millions of dollars.
The Second Circuit’s decision affirming Blaszczak and the tippee’s convictions included two notable holdings. First, the Second Circuit held that under Title 18 (unlike Title 15) the government did not need to prove a “personal benefit” for the tippee. Second, and most relevant to the Supreme Court’s decision to vacate and remand, two of the three panel members (Judge Sullivan and now-retired Judge Droney) rejected the argument that the alleged victim of the fraud, CMS, had a “purely regulatory” interest in its pre-decisional information and that the information was therefore not “property” within the meaning of Title 18 and other federal fraud statutes. The majority reasoned that CMS had a “right to exclude” that was akin to a private interest and that CMS had an economic interest in that it “invests time and resources into generating and maintaining the confidentiality of its non-public pre-decisional information,” thereby acting as a “property holder, not as sovereign.” Judge Kearse’s dissent, however, reached the conclusion that CMS’s interest in issuing a regulation was not “property” under the federal fraud statutes because CMS is “an agency of the government that regulates the conduct of others. It does so whether or not any information on which its regulation is premised is confidential.”
Five months after the Second Circuit decided Blaszczak, the Supreme Court unanimously held in Kelly v. United States that the use of regulatory authority to close two lanes of the George Washington Bridge in retaliation against a mayor who refused to endorse then-Governor Chris Christie, did not concern a “property” interest under Title 18 federal fraud statutes. The Court explained that taking control over the bridge’s traffic lanes was a “quintessential exercise of regulatory power” and not an appropriation of government property. Further, the Court concluded that the public funds used to pay toll collectors and traffic engineers as a result of the lane realignment, while property, were “only an incidental byproduct of the scheme” rather than its object, and could not sustain a property fraud conviction on their own.
After the Supreme Court decided Kelly, the defendants in Blaszczak filed petitions for writs of certiorari, seeking review of both the questions of whether regulatory information constitutes property and whether the personal benefit test applies to Title 18 charges. With respect to the property issue, the defendants aimed to capitalize on Judge Kearse’s dissent and argued that the Second Circuit’s ruling could not be reconciled with Kelly because “[t]he government has no ‘traditional’ economic interest in [predictive regulatory] information . . . which the government does not sell,” and the disclosure of which does not “deprive the government of anything of value to it.” In response, the government requested that the case be vacated and remanded so that the Second Circuit could address the property holding in view of Kelly. On reply, the defendants warned that if the case were remanded as suggested by the government, the Second Circuit’s “radical change to insider-trading law”—that Title 18 does not contain a personal benefit requirement—“would remain unaddressed.” Nevertheless, the Supreme Court granted the government’s request to vacate and remand in light of Kelly.
On remand, the Second Circuit may be persuaded to adopt the position taken by Judge Kearse in her dissent—that CMS has a merely regulatory interest in its pre-decisional information. In Kelly, the Court emphasized that “the State’s intangible rights of allocation, exclusion, and control do not create a property interest.” Kelly also held that “‘incidental’ costs, such as employee time and compensation associated with making a regulatory change, are irrelevant to whether the government has been deprived of any property.” In her dissent in Blaszczak, Judge Kearse already found that CMS’s interest was purely regulatory because CMS is “an agency of the government that regulates the conduct of others . . . . whether or not any information on which its regulation is premised is confidential.” Only one of the other two panel judges will need to be convinced in light of the Supreme Court’s new guidance in Kelly.
As previewed in their petitions for writs of certiorari, the defense in Blaszczak will likely argue that “the government’s decision about how to allocate access to that information, and when to release it,” are purely regulatory and not a sufficient property interest under Kelly. The government did not preview its merits arguments before the Supreme Court, but it may argue that, while the lane closures at issue in Bridgegate were purely regulatory, the Blaszczak majority rightly recognized that CMS’s interest in maintaining confidential information is more akin to that of a property holder than a government. Though the appropriation of CMS’s information is debatably less of a “quintessential exercise of power,” a majority of the panel could decide that Kelly is broad enough to preclude the government’s theory that “political intelligence” constitutes property under Title 18.
The Second Circuit has already had a recent opportunity to apply Kelly’s holding. In United States v. Gatto, the panel found that the property involved—athletic-based financial aid that universities awarded to the recruits—was “an object” of a scheme involving illicit payments to high school basketball recruits by a corporate sponsor. The Court reasoned that unlike the loss of property in Kelly, which was a mere byproduct of the scheme, the loss of property in Gatto was “at the heart” of the defendants’ wrongdoing because the financial aid was necessary for the recruits to attend the school and, thus, for the corporate sponsor’s scheme to succeed.
Blaszczak will present a second opportunity for the Second Circuit to draw a line between “incidental costs” and an “object of the scheme,” in addition to revisiting its analysis of whether the government has adequately proven a property interest. Whichever way the Second Circuit rules, the case shows that the fallout of the Bridgegate decision is likely to continue and particularly reverberate in aggressive theories of prosecution under Title 18’s fraud statutes.
 United States v. Blaszczak, No. 20-5649, ___ S. Ct. ____, 2021 WL 78043 (Jan. 11, 2021); United States v. Olan, No. 20-306, ___ S. Ct. ____, 2021 WL 78042 (Jan. 11, 2021).
 See David E. Brodsky et al., Second Circuit: Criminal Fraud Statutes Do Not Require Prosecutors to Show that Tippers in Insider-Trading Cases Received a “Personal Benefit,” Cleary Enforcement Watch (Jan. 13, 2020), https://www.clearyenforcementwatch.com/2020/01/second-circuit-criminal-fraud-statutes-do-not-require-prosecutors-to-show-that-tippers-in-insider-trading-cases-received-a-personal-benefit/; David E. Brodsky et al., Supreme Court Puts the Brakes on the “Bridgegate” Scandal and Affirms That Property Must Be the Object of Federal Fraud Schemes, Cleary Enforcement Watch (May 11, 2020), https://www.clearyenforcementwatch.com/2020/05/supreme-court-puts-the-brakes-on-the-bridgegate-scandal-and-affirms-that-property-must-be-the-object-of-federal-fraud-schemes/.
 See United States v. Blaszczak, 947 F.3d 19, 26-28 (2d Cir. 2019).
 See id.
 See id. at 37; see also 18 USC § 1343.
 Judge Walker subsequently joined the panel to stay the Second Circuit’s mandate pending defendants’ petitions for certiorari.
 See Blaszczak, 947 F.2d at 32-34.
 Id. at 33 (citing Cleveland v. United States, 531 U.S. 12, 23 (2000)).
 Id. at 47 (Kearse, J., dissenting).
 See Kelly v. United States, 140 S. Ct. 1565, 1568-69 (2020).
 Id. at 1572 (citing Cleveland, 531 U.S. at 23).
 Id. at 1573-74.
 See Petition for Writ of Certiorari at 13, 24, Olan v. United States, No. 20-306 (Sept. 4, 2020).
 Id. at 14-15 (quoting Cleveland, 531 U.S. at 24) (citing Blaszczak, 947 F.2d at 48-49 (Kearse, J., dissenting)).
 See Memorandum for the United States at 2, Blaszczak v. United States, No. 20-569 (November 2020).
 Reply Brief for Petitioners at 2-3, Olan, No. 20-306 (Dec. 8, 2020).
 See Blaszczak, 947 F.3d at 46-48 (Kearse, J., dissenting).
 Kelly, 140 S. Ct. at 1572 (quoting Cleveland, 531 U.S. at 23) (internal quotation marks omitted).
 Petition for Writ of Certiorari, supra note 13, at 15 (citing Kelly, 140 S. Ct. at 1573-74).
 Blaszczak, 947 F.2d at 47 (Kearse, J., dissenting).
 Petition for Writ of Certiorari, supra note 13, at 14-16.
 See United States v. Gatto, No. 19-0783, 2021 WL 137250, at *6-7 (2d. Cir. Jan. 15, 2021) (citing Kelly, 140 S. Ct. at 1573). Whether the actions in Gatto were regulatory was not at issue.
 Id. at *6.