Second Circuit Vacates Insider Trading Convictions, Narrowing the Scope of Future Prosecutions 

Alerts / January 27, 2023
Key Takeaways
  • Several insider trading convictions were recently vacated when the Second Circuit revisited the case after direction from the U.S. Supreme Court.[1]
  • Based on the Supreme Court’s decision in Kelly v. United States,[2] the Second Circuit rejected the prosecution’s argument at trial that a governmental agency’s confidential information constitutes “property” or a “thing of value” under Title 18 of the U.S. Code. The Second Circuit’s application of Kelly will further limit the scope of prosecutions under Title 18.
  • A concurrence to the Second Circuit’s majority opinion questioned the prior holding in the case: that a personal benefit to the tipper is not required for a successful Title 18 prosecution for insider trading.[3] The concurrence reinforces the significant differences between criminal and civil standards for insider trading.
Factual Background

As discussed more fully in our alert when Blaszczak I was issued,[4] the crux of this case was that four individuals were charged with and convicted of an alleged scheme to obtain nonpublic information from the Centers for Medicare and Medicaid Services (CMS) pertaining to reimbursement rates for certain medical treatments.[5] A CMS employee, defendant Christopher Worrall, provided material nonpublic information to his friend and former CMS colleague, a political intelligence consultant named David Blaszczak.[6] Blaszczak then passed that information on to his client, Deerfield Management Company, L.P., which profitably traded on it.[7]

In terms of the personal benefit element required to prove insider trading since the Supreme Court’s decision in Dirks v. SEC,[8] Blaszczak gave Worrall free meals and sports tickets as well as offering Worrall an opportunity to join his firm (which Worrall declined). Blaszczak himself was paid through his firm’s consulting arrangement with Deerfield.

Procedural Background

One of the notable aspects of the case was the prosecution under both Title 15 and Title 18 of the U.S. Code. While Section 10(b) of the Exchange Act (which is part of Title 15) requires a personal benefit under Dirks and its progeny, it was not clear that the wire and securities fraud statutes under 18 U.S.C. §§ 1343 and 1348 did so too. And so the jury instructions at trial differed for the different charges, and the jury convicted under Title 18 but acquitted under Title 15.[9]

The defendants appealed on several grounds, including (i) whether the district court erred by refusing to instruct the jury on the Dirks personal benefit element in the Title 18 counts; and (ii) whether the confidential CMS information was property or a thing of value for the purposes of the wire fraud and securities fraud statutes under Title 18.[10]

On Dec. 30, 2019, in Blaszczak I, a three-judge panel of the Second Circuit voted 2-1 to affirm the convictions. Judge Richard Sullivan, writing for the majority, concluded that the district court had not erred by failing to instruct on the personal benefit requirement on the Title 18 charges and that the CMS information was indeed property.[11] Judge Amalya Kearse dissented solely on the ground of whether CMS’s pre-decisional regulatory information was property or a thing of value.[12]

Mere months after Blaszczak I was issued, the U.S. Supreme Court decided Kelly v. United States, reversing the convictions of aides to former New Jersey Gov. Chris Christie in connection with “Bridgegate.”[13] The Court unanimously held that snarling traffic on the George Washington Bridge was a “quintessential exercise of regulatory power,” not an appropriation of property as required for charges under the statutes for wire fraud and fraud on a federally funded program or entity.[14]

The Kelly decision reinvigorated the defendants’ arguments and bolstered Judge Kearse’s dissent. When the Blaszczak I defendants filed a petition for certiorari, the Supreme Court summarily vacated and remanded the convictions for reconsideration by the Second Circuit in light of Kelly.[15]

On remand, the government conceded that the convictions could not stand under Kelly. The government’s brief stated that it “now” takes the position 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. §§ 1343 and 1348.”[16] Accordingly, the government wrote, CMS’s “confidential information at issue in this case does not constitute ‘property’ or a ‘thing of value’ under the relevant statutes after Kelly.”[17]

The Decision in Blaszczak II

On Dec. 27, 2022, a panel of Second Circuit judges issued its decision on remand. Notably, two-thirds of the panel were the same as in Blaszczak I, and Judges Kearse and Sullivan again came out on opposite sides. But in this decision, Judge John Walker replaced Judge Christopher Droney, who had retired in the meantime, and the outcome was reversed from Blaszczak I, with Judge Kearse writing the majority opinion, joined by Judge Walker.

A. Judge Kearse’s Majority Opinion

Because the government conceded that the CMS confidential information was not property or a thing of value, it requested remand for dismissal of the substantive securities fraud, wire fraud and conversion of government property counts. But the government sought to sustain the convictions on conspiracy charges.[18]

Like her dissent in Blaszczak I, Judge Kearse’s majority opinion focused on whether government information may constitute property or a thing of value. Bolstered by Kelly, Judge Kearse found that it did not, distinguishing between a commercial entity’s confidential information that could be “distributed and sold to those who [would] pay money for it”[19] and information from a government entity that “does not sell, or offer for sale, a service or a product.”[20]

Judge Kearse concluded that the purported property at issue in the scheme fell short of even the purported property in Kelly. If “the conduct in Kelly – altering a regulation – does not constitute a deprivation of government property,” then it follows that “merely obtaining information as to what the agency’s preferred regulation would be, and when it would be announced,” is not the agency’s money, property or thing of value.[21] Accordingly, Kelly mandated dismissal of the substantive charges.[22]

Judge Kearse also rejected the government’s argument that the conspiracy convictions could be upheld on the basis that the government’s interpretation of the substantive charges was harmless error, though the majority opinion permitted the government to retry the conspiracy charges (but not the substantive charges) on remand.[23] On this, she pointed to the fact that the only substantive convictions were on property-related charges, while every securities-related substantive charge led to an acquittal. Notably, however, the majority opinion also rejected the defendants’ arguments to reverse the convictions, because there was sufficient evidence for conspiracy to commit securities fraud and to commit an offense against the United States to submit the case to a jury.[24]

B. Judge Walker’s Concurrence

Judge Walker, joined by Judge Kearse, wrote a concurrence “to highlight an anomaly” that Judge Kearse’s majority opinion did not address: the holding from Blaszczak I upholding a conviction for insider trading under Title 18 without proof of a tipper’s personal benefit, despite Title 15’s criminal or civil penalties for insider trading that require a personal benefit.[25] Labeling the discrepancy “odd,” Judge Walker argued that “traditional notions of fair play are offended by the present incongruence in this circuit between civil and criminal deterrence” because “[i]t should not require fewer elements to prove a criminal conviction than to impose civil penalties for the same conduct.”[26]

Judge Walker reviewed the statutory language in Rule 10b-5 and Section 10(b) of the Exchange Act, under Title 15, and 18 U.S.C. § 1348, noting that there is no personal benefit mentioned in either statute.[27] However, Judge Walker wrote, “The risk of overdeterrence looms large” if the elements of insider trading were met more easily in a criminal action than in a civil one.[28] While the government as far back as Dirks acknowledged the value of securities analysts to the market, Judge Walker said that the Blaszczak I regime could “inhibit[ ]” certain “lawful market analyst activity,” even with the higher burden of proof in a criminal trial.[29]

Judge Walker acknowledged that judges “must ‘take the statute as we find it’ and that we should ‘assume that Congress is aware of existing law when it passes legislation,’ including statutes and judicial ‘gloss’ – such as Dirks’s personal benefit test.”[30] However, he concluded, the discrepancy in the personal benefit test was a “glaring anomaly . . . that warrants further attention by Congress and the courts.”[31]

C. Judge Sullivan’s Dissent

Judge Sullivan, who wrote the majority in Blaszczak I, wrote a sharp dissent. He criticized the majority decision in Blaszczak II as “effectively permit[ting] sophisticated insiders to leverage their access to confidential government information and sell it to the highest bidders,” like the hedge fund and its employees who benefited from CMS’s confidential information in Blaszczak.[32]

With regard to the holding that CMS’s confidential information was not property, Judge Sullivan contended that the relevant statutory language does not distinguish between tangible and intangible property, nor between information held by a government agency and that held by a private entity. Judge Sullivan distinguished the majority’s key cases, namely Cleveland v. United States and Kelly,[33] and analogized United States v. Girard, where the Second Circuit affirmed convictions under Title 18 for selling and conspiring to sell confidential information about informants working for the Drug Enforcement Agency (DEA).[34] Casting doubt on any rationale for distinguishing Blaszczak from Girard, Judge Sullivan wrote that the majority “offer[ed] no rationale for a rule that would protect the property rights of commercial entities but not those of governmental agencies possessing comparable information.”[35] After all, why “would the fraud statutes prohibit schemes to gain access to a manufacturer’s confidential information concerning the costs of production for assorted medical devices, but not extend that same protection to the government’s confidential information regarding the reimbursement rates for those very devices?”[36]

After a critique of the “deference” the majority opinion gave to the Department of Justice’s position on the meaning of “property” under Title 18,[37] Judge Sullivan turned to the concurrence, which he labeled “pages of dicta on a subject that is not even properly before us.”[38] Deriding the concurrence as a “gratuitous advisory opinion on a subject that clearly exceeds the scope of the Supreme Court’s remand order” and the briefing at bar,[39] Judge Sullivan claimed to be “reluctant to engage” with it.[40] Nevertheless, he continued, there is nothing in the statutory language in Title 15 and Title 18 compelling the same standard for all insider trading charges, especially given that the personal benefit test from Dirks was an effort to “effectuate[ ] the purpose of the Exchange Act,” not Title 18.[41]

Judge Sullivan concluded his dissent by lamenting the dicta in the majority and concurrence as being likely to “lead to confusion among litigants, lawyers, and lower courts alike.”[42] Moreover, he wrote, “[T]he only winners in this appeal will be the defendants – sophisticated insiders who misappropriated confidential government information to enrich themselves and their associated hedge funds – and those like them who will be emboldened by today’s decision to believe that the broad proscriptions of the federal fraud statutes do not in fact mean what they say.”[43]


There are several significant lessons from Blaszczak II:

  1. There is useful guidance here for the market about whether a government agency’s confidential information is property for purposes of Title 18 fraud statutes, but there is potential for confusion further afield. Applied here to the wire fraud and conversion of property statutes, the majority’s interpretation is both wide-reaching (because of how many prosecutions rely on those two sections of Title 18) and narrowly applicable (the interpretation of property does not necessarily apply to securities fraud under Title 15). To illustrate the potential for confusion in light of Kelly and the remand from the Supreme Court in Blaszczak v. United States, perhaps even leaking Supreme Court decisions might not implicate property or a thing of value that could be prosecuted under Title 18.
  2. Given the concurrence, the viability of the holding from Blaszczak I eliminating the personal benefit requirement for Title 18 is up in the air. It is not clear how the Second Circuit would rule if the issue were to be ripe again, including if Judge Sullivan were to request en banc review of Blaszczak II.[44] This current ambiguity begs for clarity from the appellate courts or Congress.
  3. The contrast between the treatment of a government agency’s confidential information and that of a private entity is stark under Blaszczak II. Thus, Blaszczak II will not stop other insider trading prosecutions from moving forward in other factual contexts.
  4. As mentioned, the majority in Blaszczak II was forced to reconcile its conclusion here with the upholding of the conviction in Girard, where the DEA’s confidential information regarding informants was a thing of value sufficient to convict for conversion of government property. Creative prosecutors may try to work the angle of convincing a court (and jury) that other agencies’ confidential information is more akin to the information in Girard than to that in Blaszczak II.

By: Jonathan B. New, Jonathan A. Forman, John J. Carney and Matthew B. Friedman

[1] United States v. Blaszczak, 56 F.4th 230 (2d Cir. 2022) (Blaszczak II).

[2] Kelly v. United States, 140 S. Ct. 1565 (2020).

[3] See United States v. Blaszczak, 947 F.3d 19, 34-37 (2d Cir. 2019) (Blaszczak I).


[5] Blaszczak II, 56 F.4th at 233-34.

[6] Id. at 234.

[7] Id.

[8] 463 U.S. 646 (1983).

[9] Blaszczak I, 947 F.3d at 29-30.

[10] Id. at 30.

[11] Id. at 26-45.

[12] Id. at 45-49 (Kearse, J., dissenting).

[13] See Kelly, 140 S. Ct. 1565 (2020).

[14] Id. at 1572.

[15] Blaszczak v. United States, 141 S. Ct. 1040 (mem.) (2021).

[16] Blaszczak II, 56 F.4th at 236.

[17] Id.

[18] Id. at 236-37.

[19] See id. at 243 (citing Carpenter v. United States, 484 U.S. 19 (1987)).

[20] Id.

[21] Id. at 244.

[22] Id.

[23] Id. at 245.

[24] Id. at 245-46.

[25] Id. at 246 (Walker, J., concurring).

[26] Id.

[27] Id. at 246-49.

[28] Id. at 249.

[29] Id. at 249-50.

[30] Id. at 250.

[31] Id.

[32] Id. at 250 (Sullivan, J., dissenting).

[33] Id. at 252-55 (discussing Cleveland v. United States, 531 U.S. 12 (2000), and Kelly, 140 S. Ct. 1565 (2020)).

[34] Id. at 255-56 (discussing United States v. Girard, 601 F.2d 69 (2d Cir. 1979)).

[35] Id. at 256.

[36] Id.

[37] Id. at 258.

[38] Id. at 261.

[39] Id. at 251.

[40] Id. at 262.

[41] Id.

[42] Id. at 263.

[43] Id.

[44] Several decisions outside the Second Circuit have concluded the same way as the majority in Blaszczak I (and Judge Sullivan’s dissent in Blaszczak II) on this point. See, e.g., United States v. Ramsey, 565 F. Supp. 3d 641, 643-46 (E.D. Pa. 2021); United States v. Slawson, 2014 WL 5804191, at *6 (N.D. Ga. Nov. 7, 2014), report and recommendation adopted, 2014 WL 6990307 (N.D. Ga. Dec. 10, 2014).

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