New York Securities Fraud Ruling Threatens US White-Collar Cases

A recent appeals court decision invalidating securities fraud convictions could undercut Justice Department enforcement of insider trading, public corruption, crypto fraud, and other white-collar crimes.

The US Court of Appeals for the Second Circuit tossed convictions on Dec. 27 of four men who coordinated to trade stocks based on leaked impending Medicare reimbursement rate changes.

The divided Manhattan panel held that the Center for Medicare and Medicaid Services’ confidential information—which two of the defendants used to earn millions at their hedge funds by shorting stocks of affected companies—didn’t qualify as “property” or a “thing of value” under wire and securities fraud laws.

At a minimum, former federal prosecutors and other lawyers predict the United States v. Blaszczak opinion—which received little attention when it came down two days after Christmas—will impede cases brought against those who’ve stolen government regulatory information. The decision could also provide new avenues of defense to those investigated for a variety of criminal offenses in the public and private sectors.

“There is no doubt in my mind that there are going to be cases that are not brought, and not opened or investigated, because of this,” said Justin Weitz, a Morgan Lewis partner who until recently oversaw market integrity enforcement as a Justice Department criminal fraud section supervisor.

The opinion most directly implicates the department’s increasing reliance on the Title 18 criminal code to pursue insider trading cases in multiple contexts.

When prosecutors assess the code’s application to confidential business information held at companies, they’ll now “have to ask themselves, ‘does the Blaszczak decision cast doubt on the theory that this intangible information will be recognized as constituting property?’” said Katherine Goldstein, an Akin Gump partner.

“That is really not a question that prosecutors were asking,” added Goldstein, who was formerly chief of the securities and commodities task force at the Southern District of New York US Attorney’s office.

Even if the decision is interpreted as only relevant in the government context, some white-collar experts worry that alone could lead to “open season” on closely-held information such as interest rate hikes or DOJ corporate settlements.

They cite the dissenting view of Judge Richard Sullivan, who stated: “The majority opinion effectively permits sophisticated insiders to leverage their access to confidential government information and sell it to the highest bidders.”

What Qualifies?

When DOJ seeks to indict and sustain convictions under the wide-ranging Title 18, extending to health-care and mail frauds—a critical element is proving the deprivation of money or property.

The Second Circuit determined the nonpublic CMS pricing updates aren’t property because they’re not the agency’s “stock in trade” to be sold to the public.

The court’s analysis could apply in the far more common insider trading scenarios when DOJ charges financial services industry employees with trading on tips leaked from inside companies.

“All of a sudden you’re asking yourself, well is earnings information a business’s ‘stock in trade’? Not really,” said Goldstein, who was appointed by the Second Circuit to file an amicus brief arguing the Blaszczak convictions should be upheld. “What would typically be considered valuable inside information out of a public company—top line revenues, earnings—that’s not usually a business’s ‘stock in trade.’ Does that qualify?”

DOJ has other legal theories at its disposal, outside of Title 18, to indict individuals on insider trading and other types of fraud implicated by Blaszczak. That includes Title 15 securities fraud laws and the 2012 Stop Trading on Congressional Knowledge (STOCK) Act.

“The government is diligent and aggressive when they perceive there to be wrongdoing, and will seek to use the various tools available to them,” said Elizabeth Mitchell, a securities law partner at WilmerHale.

‘Confess Error’

The case’s complex procedural history includes an unusual detail to some former DOJ attorneys, which may cause further rippling effects.

The Second Circuit initially upheld the Blaszczak convictions, before the US Supreme Court remanded the case in 2020 for reconsideration in light of its unanimous decision in Kelly v. United States. The justices overturned the convictions of aides to former New Jersey Gov. Chris Christie for their ties to the so-called “Bridgegate” scandal.

But prosecutors abandoned defense of most of the charges due to the new precedent. They filed a brief stating they were “constrained to confess error at the direction of the Solicitor General’s Office.”

That concession had the consequence of leading to the most recent Second Circuit opinion that went much further than DOJ likely expected, attorneys say.

For instance, the concurring opinion—touching on an issue that the justices never asked the court to consider—argued that insider trading convictions should require proof of a personal benefit to a tipper. That view isn’t binding, but may constrain prosecutors, who often find it difficult to collect evidence of how leakers gain from insider trading.

Public Corruption, Crypto

The Second Circuit’s narrowing of confidential information that constitutes government “property” or a “thing of value” to only that which is “inherently valuable” may also create new hurdles for prosecutors enforcing public corruption laws, said Monique Abrishami, a partner at Levy Firestone Muse.

“This could be a case that practitioners try to use to get courts to rethink definitions that have been established in corruption law for some time, like the outer parameters of a ‘thing of value,’” said Abrishami, a former trial attorney in DOJ’s public integrity section.

The decision could also create uncertainty in cryptocurrency enforcement, where prosecutors are still grappling with whether digital assets meet the definition of a “security” under Title 15 securities fraud.

As a workaround, DOJ prosecutors have been turning to Title 18’s wire fraud statute as “perhaps the panacea,” said Goldstein. But now, “this opinion makes Title 18 in some respects as unstable as Title 15.”