On December 29, 2022, in a closely-watched insider trading case, the Second Circuit decided United States v. Blaszczak (“Blaszczak II”). The Supreme Court in January 2021 had vacated and remanded the Second Circuit’s prior decision in light of Kelly v. United States (also known as the “Bridgegate” decision). On remand, a divided panel of the Second Circuit found that trading on the basis of certain confidential government information related to pending regulation does not give rise to violations of the criminal wire fraud and securities fraud statutes.
Background on Insider Trading Law
No federal statute defines and prohibits insider trading. Prosecutors and the Securities and Exchange Commission have historically brought criminal and civil insider trading cases under Section 10(b) of the Securities Exchange Act (codified in Title 15 of the United States Code), the most widely used antifraud provision of the federal securities laws. While Section 10(b) does not explicitly outlaw insider trading, its prohibition of “deceptive devices” has been interpreted to include insider trading, and the legal contours of insider trading violations are thus largely judge-made. Most notably, in Dirks v. SEC, the Supreme Court held that insiders who disclose confidential corporate information breach their duty to the corporation’s shareholders, thereby violating Section 10(b), only when they act in exchange for a “personal benefit.” Although Dirks was based on the “classical” theory of insider trading, which involves a corporate insider’s breach of a duty to the shareholders of the company whose stock is being traded, the personal benefit requirement has also been held to apply to the “misappropriation” theory of insider trading, which entails the theft of information in breach of a duty of confidence to the information’s source.
Perhaps in part due to the relatively unsettled elements of an insider trading offense under Section 10(b), prosecutors have also attempted to bring insider trading cases under 18 U.S.C. § 1343 and § 1348, the criminal wire fraud and securities fraud statutes, respectively. Section 1348 “was passed in the wake of the 2008 financial crisis and designed to ‘provide [f]ederal investigators and prosecutors with significant new criminal and civil tools to assist in holding accountable those who have committed financial fraud.’”
Like Section 10(b), Section 1348 does not explicitly reference the personal benefit test (nor does Section 1343). However, Section 1343 wire fraud and Section 1348(2) securities fraud both include a requirement absent from Section 10(b), that the charged fraud must be for the purpose of “obtain[ing] . . . money or property.”
Factual Background and Trial Decision
We have previously written about this case several times. David Blaszczak worked as a “political intelligence” consultant and maintained friendships with former colleagues at the Centers for Medicare & Medicaid Services (“CMS”). Through these colleagues, Blaszczak learned of upcoming changes in Medicare and Medicaid reimbursement rates for certain medical procedures. He shared this information with hedge funds, which traded on the information before it became public.
Blaszczak, one of his CMS sources, and two hedge fund partners were charged with, among other things, Title 18 securities and wire fraud in violation of Sections 1343 and 1348, as well as Title 15 securities fraud. At trial, Judge Kaplan instructed the jury that in order to convict on the Title 15 charges, prosecutors had to prove that the CMS employee tipped Blaszczak in exchange for a “personal benefit” and that the hedge fund partners knew that a CMS insider had tipped in exchange for a “personal benefit.” Over a defense objection, however, the Court did not give the same “personal benefit” instruction for the Title 18 wire and securities fraud offenses.
The jury acquitted all defendants on the substantive Title 15 counts, but it convicted each defendant on at least one count of Title 18 wire fraud under Section 1343, and most of the defendants (including Blaszczak) were convicted on at least one count of Title 18 securities fraud under Section 1348.
Blaszczak I and Kelly
On December 30, 2019, the Second Circuit affirmed the convictions, with 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, two of the three panel members (Judge Sullivan and now-retired Judge Droney) held that CMS did have a “property” interest in the confidentiality of information related to its regulatory decisions within the meaning of the Section 1343 wire fraud and Section 1348 securities fraud provisions, rejecting the argument that CMS had a “purely regulatory” interest in its pre-decisional information. Judge Kearse’s dissent, however, concluded that CMS’s interest in issuing the regulation was not “property” under the statutes because information is not CMS’s “stock in trade,” in the sense that it does not buy or sell information, and CMS would execute its regulatory mission “whether or not any information on which its regulation is premised is confidential.”
In May 2020, the Supreme Court issued a unanimous decision in Kelly v. United States. The Court held that the use of the New Jersey state government’s regulatory authority to close two lanes of the George Washington Bridge, in retaliation against a mayor who refused to endorse then-Governor Chris Christie for reelection, did not constitute a “property” interest under the Title 18 fraud statutes at issue in that case. 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.
After Kelly, the Blaszczak defendants sought certiorari on two questions: first, whether regulatory information constitutes property under Kelly, and second, whether the “personal benefit” test applies to Title 18 securities fraud charges. On January 11, 2021, the Supreme Court vacated and remanded the case to the Second Circuit “for further consideration in light of Kelly v. United States.”
On remand, defendants contended that, under Kelly, the CMS information does not constitute “property” within the meaning of the Title 18 wire and securities fraud provisions. For its part, the Department of Justice concurred, “confess[ing] error” as to the counts involving “property,” and it asked the Second Circuit to either reverse the convictions on those counts or to remand to the district court so that the government could dismiss them. The government’s brief on remand stated that “it is now the position of the [DOJ] that in a case involving confidential government information, that information typically must have economic value in the hands of the relevant government entity to constitute ‘property’ for purposes of 18 U.S.C. Sections 1343 and 1348.”
Judge Kearse, now writing for the majority (which Judge Walker joined), remanded the case to the district court for dismissal of the Section 1343 and 1348 charges. The majority contrasted governmental actors with private actors, stating that “[w]hile confidential information may constitute property of a commercial entity . . . the same is not true with respect to a regulatory agency such as CMS. CMS is not a commercial entity; it does not sell, or offer for sale, a service or a product.” For CMS, according to the majority, the premature disclosure of a planned regulation “has no direct impact on the government’s fisc, although it might well impact CMS’s subsequent regulatory choices.” Accordingly, the majority found that “the information reflecting  a decision [as to a planned regulation] and the timing of that disclosure are regulatory in character and do not constitute money or property of the victim . . .” The majority distinguished this kind of pre-decisional, “purely regulatory” information from “information that has inherent value” in the hands of an agency, such as the Drug Enforcement Administration’s confidential informant records, which the DEA uses “in investigations and preparation for prosecutions; its theft would interfere with those operations . . . .”
While the Second Circuit’s ruling created new precedent in that circuit regarding whether regulatory information constitutes property under Kelly, the Supreme Court’s remand did not present the Second Circuit with the other question on which the Blaszczak defendants had petitioned the Supreme Court: whether the “personal benefit” test of Title 15 securities fraud applies to Title 18 securities fraud. Indeed, Judge Walker (joined by Judge Kearse) issued a concurrence specifically to “highlight a glaring anomaly that the panel’s decision creates” by leaving untouched Blaszczak I’s holding that Section 10(b) entails a “personal benefit” requirement but that Section 1348 does not.
Judge Sullivan (who authored the majority in Blaszczak I) issued a lengthy dissent. Among other points, Judge Sullivan advanced two primary arguments with respect to substantive insider trading law. First, Judge Sullivan argued that the CMS information constituted “property” under Section 1343 wire fraud and Section 1348 securities fraud. He pointed out that neither provision “distinguishes between tangible and intangible property, or in any way suggests that information in the possession of a government agency as opposed to a private entity is beyond the scope of the statute.” Moreover, defendants’ goal “was not to influence the government’s licensing decision or alter the government’s reimbursement policy—each of which obviously is a regulatory act. It was instead to misappropriate confidential information in CMS’s possession so that the defendants could trade on it.” Judge Sullivan analogized CMS’s pre-decisional reimbursement rates to the information in a Supreme Court precedent holding that a newspaper had a property interest in keeping the contents of upcoming columns confidential until their publication, and to a prior Second Circuit case—which the majority brushed aside—holding that the DEA had a property interest in confidential informant files. Accordingly, Judge Sullivan argued that the convictions should not have been vacated in light of Kelly.
Second, the dissent took issue with the concurrence, which it characterized as “offer[ing] pages of dicta” about the personal benefit requirement. Judge Sullivan argued that Section 1348 should not be read to incorporate the “personal benefit” requirement, including because its enactment in the wake of the financial crisis “make[s] it far more plausible that Congress did not intend for [Section 1348] to be a mere carbon copy of the Title 15 securities-fraud statute.”
It remains to be seen whether the view expressed in the Blaszczak II concurrence will gain traction; in the Second Circuit it would take the whole Court of Appeals sitting en banc, or a ruling of the Supreme Court, to overturn the Blaszczak I panel’s opinion. In the meantime, for companies that routinely engage with the government through consultants and lobbyists, who may come into contact with confidential regulatory information (and may then pass that information along to company employees), what potential exposure remains after Blaszczak II?
The extent to which the majority purports to distinguish between the confidential information of government and private entities is unclear. Judge Sullivan detected such a distinction, arguing that “it defies common sense to think that Congress would give fraudsters carte blanche to misappropriate the confidential information of any and every regulatory agency.”
Moreover, while the DOJ is of course not bound in perpetuity by its statements regarding statutory interpretation, it is noteworthy that the DOJ stated that its current position is that “in a case involving confidential government information, that information typically must have economic value in the hands of the relevant government entity to constitute ‘property’ for purposes of 18 U.S.C. Sections 1343 and 1348.” A significant open question is where future courts will draw the line between what the Blaszczak II majority held was CMS’s “purely regulatory” information related solely to the act of regulation, on the one hand, and “inherently valuable law enforcement information” that can be used “in investigations and preparation for prosecutions,” on the other hand, which the court held does support a property interest. This distinction, newly drawn by the Blaszczak II majority, could be difficult to apply, for instance for the many federal agencies, like the SEC, that execute both regulatory and law enforcement functions. Given this uncertainty, and given the fact that even the majority acknowledged that some confidential government information can support a property interest, entities would still be wise to exercise caution when considering trading on potentially confidential information acquired from a government agency. Moreover, there are multiple other charges federal prosecutors could use to target federal employees who divulge confidential information, such as 18 U.S.C. § 1905, or individuals who misappropriate government documents, such as 18 U.S.C. § 2701, although these provisions may not provide for the kind of jail terms and fines available under the wire fraud and insider trading provisions of Title 18.
As to confidential information from private sources, however, it seems likely that Blaszczak I’s holding that Section 1348 does not require a “personal benefit” lives on, at least in some form. It remains to be seen whether courts outside the Second Circuit will follow Blaszczak I in this regard. Indeed, the uncertainty as to whether there now exists a distinction in the Second Circuit between the confidential information of public and private entities, as well as the “personal benefit” gap, may cause the DOJ to rely less on Section 1348 and instead return to Title 15 as its primary vehicle to prosecute insider trading cases. While Title 15 insider trading does require a personal benefit to the tipper, it does not require the government to prove that the information was equivalent to deprivation of money or property. This could provide an opportunity to further refine the personal benefit test.
 56 F.4th 230 (2d Cir., Dec. 27, 2022).
 463 U.S. 646, 663 (1983). Courts have since grappled with what constitutes a “personal benefit.”
 See SEC v. Obus, 693 F.3d 276, 287-88 (2d Cir. 2012) (holding that the personal benefit test applies in misappropriation cases); U.S. v. Newman, 773 F.3d 438, 446 (2d Cir. 2014) (“The elements of tipping liability are the same, regardless of whether the tipper’s duty arises under the ‘classical’ or the ‘misappropriation’ theory.”) (citing Obus, 693 F.3d at 285-86); see also Salman v. U.S., 580 U.S. 39, 137 S. Ct. 420, 425 n.2 (2016) (assuming that the same tipper-tippee test applied under either a classical or misappropriation theory).
 Blaszczak II at 263 (Sullivan, J., dissenting) (citing Presidential Statement on Signing the Fraud Enforcement Act of 2009, 1 Pub. Papers 689 (May 20, 2009)).
 See id. at 233-34.
 Id. at 234. The defendants were also charged with conversion of government property, in violation of Title 18, Section 641, but that charge is outside the scope of this post.
 U.S. v. Blaszczak, 947 F.3d 19, 29 (2d Cir. 2019) (“Blaszczak I”).
 Blaszczak II at 234.
 Blaszczak I at 37.
 Judge Walker subsequently joined the panel to stay the Second Circuit’s mandate pending defendants’ petitions for certiorari.
 See Blaszczak I at 32-34.
 Id. at 47 (Kearse, J., dissenting).
 See Kelly v. U.S., 140 S. Ct. 1565, 1568-69 (2020).
 Id. at 1572.
 See Petition for Writ of Certiorari at 13, 24, Olan v. U.S., No. 20-306 (Sept. 4, 2020).
 See Olan v. U.S., 141 S. Ct. 1040 (2021).
 Blaszczak II at 236.
 Brief on Remand for the United States of America at 7, No. 18-2811 (L), ECF No. 453 (Apr. 2, 2021).
 Blaszczak II at 233. The majority also remanded for further proceedings based on certain of the conspiracy charges.
 Id. at 243.
 Id. at 244.
 Id. at 244.
 Id. at 250 (Walker, J., concurring).
 Id. at 251 (Sullivan, J., dissenting). See also id. at 255 (taking issue with the majority’s “suggest[ion] that a government agency cannot have a property interest in confidential information because it is not a commercial entity”) (internal citation omitted).
 Id. at 253.
 Id. at 252-53, 255-56.
 Id. at 261.
 Id. at 263.
 Id. at 256 (internal citation omitted).
 ECF No. 453 at 7.