United States v. Blaszczak
947 F.3d 192 (2d Cir. 2019) (2019)
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Rule of Law:
Confidential government information, such as an agency's predecisional plans, can be considered "property" under federal wire fraud and Title 18 securities fraud statutes and a "thing of value" under the conversion statute, without requiring the "personal-benefit" test established for Title 15 securities fraud.
Facts:
- David Blaszczak, a "political intelligence" consultant and former employee of the Centers for Medicare & Medicaid Services (CMS), developed unique access to the agency's confidential nonpublic predecisional information through inside sources, including CMS employee Christopher Worrall.
- Between 2009 and 2014, Blaszczak provided confidential CMS information, such as the timing and substance of upcoming rule changes (e.g., reduced reimbursement rates for radiation oncology and end-stage renal disease treatments), to Theodore Huber and Robert Olan, partners at the healthcare-focused hedge fund Deerfield Management Company, L.P.
- Huber and Olan, along with another Deerfield partner (Jordan Fogel), relied on Blaszczak's information to recommend that Deerfield make trades, such as shorting stocks in companies (e.g., Varian Medical Systems, Fresenius Medical Care, DaVita Healthcare Partners Inc.) that would be negatively affected by the proposed rule changes.
- As a result of these trades, Deerfield earned substantial profits, including approximately $2.76 million from Varian stock and over $2.7 million from trades related to radiation oncology rules.
- In another scheme (2010-2013), Blaszczak also provided similar confidential CMS information to Christopher Plaford, a portfolio manager at the hedge fund Visium Asset Management, L.P., regarding anticipated cuts to home healthcare coverage reimbursement rates.
- Plaford used Blaszczak's information to guide Visium's trading strategy, including maintaining short positions and buying put-options in affected companies, leading to approximately $330,000 in trading profits.
- Defendants knew the information was nonpublic and confidential, with CMS employees subject to rules prohibiting unauthorized disclosure of nonpublic information (5 C.F.R. § 2635.703(a)) and receiving extensive training on these rules.
Procedural Posture:
- On March 5, 2018, the government filed an eighteen-count superseding indictment in the United States District Court for the Southern District of New York, charging David Blaszczak, Theodore Huber, Robert Olan, and Christopher Worrall with various offenses, including wire fraud, Title 18 securities fraud, conversion of U.S. property, and conspiracy.
- The case proceeded to a jury trial before Judge Kaplan in the District Court on April 2, 2018, with parties resting on April 23, 2018.
- The District Court instructed the jury to apply the Dirks "personal-benefit" test for Title 15 securities fraud counts but refused to apply it to the wire fraud and Title 18 securities fraud counts.
- On May 3, 2018, the jury returned a split verdict, acquitting all defendants on the Title 15 securities fraud counts; Blaszczak and Worrall on offenses related to NxStage information; and Worrall on some conspiracies and substantive offenses.
- The jury found all defendants guilty of conversion and wire fraud; all defendants but Worrall guilty of conspiracy and Title 18 securities fraud; and Blaszczak alone guilty of additional offenses.
- On September 13, 2018, the District Court denied Defendants' post-trial motions for a new trial and/or judgment of acquittal.
- The District Court proceeded to sentencing and granted all defendants bail pending appeal, recognizing that the appeal would present novel and substantial questions.
- Defendants timely appealed their judgments of conviction to the United States Court of Appeals for the Second Circuit.
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Issue:
Does confidential government predecisional information qualify as "property" for federal wire fraud and Title 18 securities fraud statutes, and does the "personal-benefit" test from Dirks v. SEC apply to these Title 18 fraud statutes?
Opinions:
Majority - Richard J. Sullivan
Yes, confidential government predecisional information qualifies as "property" for federal wire fraud and Title 18 securities fraud statutes, and no, the "personal-benefit" test from Dirks v. SEC does not apply to these Title 18 fraud statutes. Written by Circuit Judge Sullivan, the majority affirmed the convictions, holding that confidential government information, such as CMS's predecisional regulatory plans, constitutes "property" for purposes of the wire fraud (18 U.S.C. § 1343) and Title 18 securities fraud (18 U.S.C. § 1348) statutes, and a "thing of value" for the conversion statute (18 U.S.C. § 641). The court reasoned that CMS possessed a "right to exclude" others from its nonpublic information, similar to the proprietary right recognized in Carpenter v. United States, which held confidential business information to be property. This right implicates the government’s role as a property holder, not merely a sovereign regulator, distinguishing it from Cleveland v. United States, where state licenses were deemed not property in the government's hands due to a purely regulatory interest. The court further noted CMS's economic interest, as it invests resources in generating and maintaining confidentiality, and leaks could devalue these resources and impede agency efficiency. Regarding the "personal-benefit" test from Dirks v. SEC (for Title 15 securities fraud), the majority concluded it does not apply to the Title 18 fraud statutes. The court explained that Dirks's test is a judge-made doctrine specific to the purpose of the Exchange Act (Title 15), which aims to prevent insiders from using information for personal advantage. In contrast, Title 18 fraud statutes (like wire fraud and Title 18 securities fraud) operate on an embezzlement/misappropriation theory, where a breach of duty is inherent, and no additional personal benefit motive needs to be proven. Congress enacted Title 18 securities fraud (under Sarbanes-Oxley) to be a broader and less technical enforcement mechanism than Title 15 provisions, negating the need to graft Dirks's limitations. The court also rejected arguments regarding "serious interference" and "thing of value" for conversion, affirming that unauthorized disclosure inherently interferes, and citing United States v. Girard for the principle that confidential information can be a "thing of value." The court found sufficient evidence of scienter and rejected vagueness challenges, noting defendants' awareness of the information's confidential and unauthorized nature.
Dissenting - Kearse, Circuit Judge
No, confidential government information regarding planned regulations does not constitute "property" or a "thing of value" under Title 18 fraud statutes, and therefore the convictions based on these grounds should be reversed. Circuit Judge Kearse dissented, arguing that confidential predecisional information concerning CMS's planned regulations is neither "property" under 18 U.S.C. §§ 1343 and 1348 nor a "thing of value" under 18 U.S.C. § 641. Judge Kearse distinguished the case from Carpenter v. United States, stating that CMS is a regulatory agency, not a business whose "stock in trade" is information, and unlike a news publisher, CMS does not sell its information. She also distinguished United States v. Girard, which involved confidential DEA informant identities, noting that law enforcement information has inherent value to an agency's mission, whereas CMS's regulatory function proceeds regardless of whether its plans leak. Judge Kearse contended that CMS's interest in controlling the timing or secrecy of its planned regulations is purely regulatory, akin to the state's sovereign power to regulate in Cleveland v. United States, not a proprietary interest. She argued that premature disclosure has no economic impact on the government until the regulation is actually adopted, and even then, the impact aligns with CMS's ultimate decision, not the leak. Given this, Judge Kearse concluded that the conduct alleged did not fall within the statutory definitions of §§ 641, 1343, or 1348, and thus convictions on these substantive counts and related conspiracy counts (Counts 2 and 17) should be reversed. For Count 1, a conspiracy charge under 18 U.S.C. § 371 with multiple potential objectives (including invalid Title 18 fraud bases and potentially valid Title 15 fraud or CFR violations), Judge Kearse argued that because the jury's verdict did not specify which basis it found, and some bases were legally invalid, the conviction should be vacated under Yates v. United States.
Analysis:
This decision significantly broadens the scope of federal criminal liability for insider trading and the misappropriation of confidential government information. By holding that confidential government data constitutes "property" under Title 18 fraud statutes, the court expands the types of information subject to federal fraud prosecution beyond traditional commercial secrets. Crucially, the ruling eliminates the "personal-benefit" requirement for Title 18 wire fraud and securities fraud charges, making it easier for prosecutors to secure convictions in insider trading cases involving government information, as they no longer need to prove a specific quid pro quo for the information's disclosure. This could profoundly impact the "political intelligence" industry, increasing the legal risk for consultants and traders who seek to profit from nonpublic government insights.
