Second Circuit: Insider Trading Conviction Does Not Require a Finding of Personal Benefit

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On December 30, 2019, the Second Circuit issued its landmark decision in United States v. Blaszczak,[1] which widened the berth for federal prosecution of insider trading activities under Title 18 of the United States Code. The court ruled that, unlike Title 15 securities fraud convictions, federal wire fraud and Title 18 securities fraud convictions do not require any proof that an insider received a personal benefit in exchange for the material, nonpublic information that he or she disclosed.[2]

In Blaszczak, the government alleged that an employee of the Centers for Medicare & Medicaid Services (CMS) divulged confidential information about CMS to a hedge fund consultant, who then shared the information with two employees of the hedge fund, which then traded on the information. The indictment charged the CMS employee, the consultant, and the hedge fund employees with various counts of Title 15 securities fraud, wire fraud, and Title 18 securities fraud.

At the conclusion of a one-month jury trial, the district court instructed the jurors that, in order to return a guilty verdict against the CMS employee or the consultant for Title 15 securities fraud, they needed to find that the CMS employee or the consultant disclosed the confidential information in exchange for a personal benefit. The district court also instructed the jurors that, in order to convict either hedge fund employee of Title 15 securities fraud, they needed to find that that hedge fund employee knew that a CMS insider tipped the information in exchange for a personal benefit. This “personal benefit test” derives from Dirks v. SEC ,[3] a 1983 case in which the Supreme Court held that liability affixes to a divulger of insider information when he or she breaches a fiduciary duty by sharing material, nonpublic information, and that such a breach exists when the divulger receives a personal benefit in exchange for the information.

Unlike the Title 15 securities fraud provision – which is a byproduct of the Securities and Exchange Act of 1934 and which endows the government with both civil and criminal enforcement mechanisms – the wire fraud and Title 18 securities fraud provisions (enacted by virtue of the Sarbanes-Oxley Act of 2002) are pure creatures of criminal law.

Conspicuously, the district court did not instruct the jury that any wire fraud or Title 18 securities fraud conviction required a similar finding of personal benefit to the CMS employee or the consultant (or, in the case of the hedge fund employees, knowledge of a CMS insider’s exchange of information for personal benefit). Thus, the jury could have inferred that the personal benefit test did not apply to the Title 18 counts.

After four days of deliberations, the jury acquitted each defendant on all counts alleging Title 15 securities fraud. However, the jury found the CMS employee guilty on one count of wire fraud, the consultant guilty on two counts of wire fraud and two counts of Title 18 securities fraud, and each hedge fund employee guilty on one count of wire fraud and one count of Title 18 securities fraud. After denying the defendants’ post-trial motions, the district court sentenced the CMS employee, the consultant, and the hedge fund employees to twenty months, one year, and three years of imprisonment, respectively. The defendants appealed to the Second Circuit.

On appeal, the defendants argued that the district court erred by declining to instruct the jury that the personal benefit test applied to the wire fraud and Title 18 securities fraud counts just as it did to the Title 15 securities fraud counts. Their argument centered on similarities in the operative language in Title 15 and Title 18, both of which prohibit schemes to “defraud.” The defendants averred that the term “defraud” must have the same meaning in Title 15 and Title 18 such that the elements of insider trading are identical under each of those provisions.

Observing that Title 18 securities fraud “was intended to provide prosecutors with a different – and broader – enforcement mechanism to address securities fraud than what had been previously provided in the Title 15 fraud provisions,” the court rejected the defendants’ argument. As the court explained, on the one hand, Congress enacted the Title 15 fraud provisions for the limited purpose of eliminating insider trading for “personal advantage”; on the other hand, Congress enacted the Title 18 fraud provisions nearly seventy years later to overcome the “technical legal requirements” that the Title 15 fraud provisions created. Since the legislative motivations underlying Title 15 and Title 18 were asymmetrical, and since the personal benefit test is a “judge-made doctrine” that is specifically premised on the aforementioned limited purpose of the Title 15 fraud provisions, the court held that the personal benefit test does not apply to Title 18 securities fraud. The court also held (albeit in scant detail) that the personal benefit test does not apply to federal wire fraud.

The Second Circuit also rejected the defendants’ arguments that disclosed CMS information relating to reimbursement rate rules and policies was not property, and thus, was outside the scope of Title 18. However, the court determined that a regulatory agency’s “predecisional information” constituted property for purposes of the wire fraud and Title 18 securities fraud provisions.

Blaszczak offers two cautionary messages to those who would share or trade on material, nonpublic information: first, regardless of whether the disclosing party reaps any benefit by sharing the information, both that party and the recipient could face criminal liability for their actions; and second, if a person discloses proprietary confidential information, he or she could become the subject of federal prosecution.


[1] Nos. 18-2811, 18-2825, 18-2867, 18-2878, 2019 U.S. App. LEXIS 38662 (2d Cir. Dec. 30, 2019).

[2] The elements of Title 15 securities fraud are codified at 15 U.S.C. § 78j(b). The elements of federal wire fraud and Title 18 securities fraud are codified at 18 U.S.C. § 1343 and 18 U.S.C. § 1348, respectively.

[3] 463 U.S. 646, 662, 103 S. Ct. 3255, 3265 (1983).

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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