United States v. Blaszczak
56 F.4th 230 (2022)
Rule of Law:
Confidential pre-decisional government regulatory information does not constitute "money or property" for federal fraud statutes (18 U.S.C. §§ 1343, 1348) or a "thing of value" for government property conversion statutes (18 U.S.C. § 641) where the government's interest is regulatory rather than proprietary, and the scheme's object is to obtain advance information about a regulatory decision, not to alter it.
Facts:
- The Centers for Medicare & Medicaid Services (CMS) is a U.S. Department of Health and Human Services agency that administers Medicare and Medicaid, issuing rules setting healthcare provider reimbursement rates that can impact stock prices.
- Christopher Worrall was a CMS employee, and David Blaszczak was a consultant for hedge funds and a former CMS employee.
- Theodore Huber and Robert Olan were partners at Deerfield, a hedge fund.
- Between 2009 and 2014, Worrall routinely provided Blaszczak with nonpublic information regarding the timing and substance of proposed CMS rule changes affecting reimbursement rates for medical care.
- Blaszczak then transmitted this confidential information to Huber, Olan, or another Deerfield partner.
- Following receipt of this information, Deerfield engaged in profitable short sales of shares of companies that would be negatively affected by the impending reimbursement rate reductions.
- Between 2010 and 2013, Blaszczak also provided similar information to another hedge fund client, enabling that fund to profitably maintain short positions and purchase put-options in affected companies' shares.
Procedural Posture:
- Defendants David Blaszczak, Theodore Huber, Robert Olan, and Christopher Worrall were indicted and tried in the United States District Court for the Southern District of New York on various charges, including substantive counts of Title 18 securities fraud (§ 1348), wire fraud (§ 1343), and conversion of government property (§ 641), and conspiracy charges.
- The jury acquitted all defendants on all substantive counts of Title 15 securities fraud (§ 78j(b)).
- The jury convicted all four defendants on at least one count of § 641 property conversion and at least one count of § 1343 wire fraud, and convicted Blaszczak, Huber, and Olan on conspiracy Counts One and Two, with Blaszczak also convicted on Count Seventeen.
- Defendants appealed their convictions to the United States Court of Appeals for the Second Circuit (United States v. Blaszczak, 947 F.3d 19 (2d Cir. 2019), referred to as "Blaszczak I"), arguing that CMS's confidential information was not "property" or a "thing of value" under the statutes.
- The Second Circuit majority in Blaszczak I affirmed the convictions, disagreeing with the defendants' principal contention.
- Following the denial of defendants' petitions for rehearing, defendants petitioned the U.S. Supreme Court for certiorari.
- The Supreme Court granted the petitions for certiorari, vacated the Second Circuit's judgment in Blaszczak I, and remanded the case for further consideration in light of Kelly v. United States, 140 S. Ct. 1565 (2020).
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Issue:
Does confidential pre-decisional information from a government regulatory agency, concerning planned reimbursement rate changes and their announcement timing, constitute "money or property" or a "thing of value" under 18 U.S.C. §§ 1343, 1348, and 641, following the Supreme Court's decision in Kelly v. United States?
Opinions:
Majority - Kearse, Circuit Judge
No, confidential pre-decisional information from a government regulatory agency, such as CMS's planned reimbursement rate changes and announcement timing, does not constitute "money or property" or a "thing of value" under 18 U.S.C. §§ 1343, 1348, and 641 following Kelly v. United States. The Court granted the government's request to remand for dismissal of the substantive counts and Count Two, and vacated and remanded Counts One and Seventeen for further proceedings. The court reasoned that the Supreme Court's decision in Kelly v. United States clarified that federal fraud statutes are limited to protecting property rights, not criminalizing all acts of dishonesty, and require the object of fraud to be money or property. Kelly held that a scheme to alter a government's regulatory choice is not an appropriation of government property. The court found this principle applicable to CMS's confidential information, as CMS is a regulatory agency, not a commercial entity that sells services or products. The government's right to determine reimbursement rates and their announcement timing is a regulatory power, not a proprietary interest akin to property. Therefore, merely obtaining advance information about such regulatory decisions, rather than altering them, cannot be considered deprivation of the agency's money, property, or a "thing of value." The court distinguished United States v. Girard, which involved theft of inherently valuable law enforcement informant records, as not comparable to the regulatory information here. The court also afforded deference to the Executive Branch's prosecutorial discretion, noting that the government, in light of Kelly, had confessed error regarding the property-related charges. For the remaining conspiracy counts (Counts One and Seventeen), the court concluded that the jury's general verdicts were flawed because they could have rested on the now-invalid § 641 property conversion goal. The government failed to prove harmless error beyond a reasonable doubt, especially given the jury's acquittals on Title 15 securities fraud charges and the government's trial emphasis on "theft."
Concurring - John M. Walker, Jr., Circuit Judge
No, the convictions should be vacated as the information at issue was not "property." Walker's concurring opinion joined the majority opinion in full but wrote separately to highlight an "anomaly" created by the prior Blaszczak I decision. He pointed out that a criminal conviction for tipper-tippee insider trading securities fraud under 18 U.S.C. § 1348 does not require proof that the tipper received a "personal benefit," a requirement present for civil or criminal penalties under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Walker argued that this "incongruence" is concerning because it requires fewer elements to prove a criminal conviction than to impose civil penalties for the same conduct, leading to potential overdeterrence and inhibiting legitimate activities by securities analysts who need clear guidelines. He suggested that this asymmetry warrants further attention from the court, the Supreme Court, and Congress, despite not being outcome-determinative on this remand.
Dissenting - Richard J. Sullivan, Circuit Judge
Yes, confidential pre-decisional information from a government regulatory agency, such as CMS's planned reimbursement rate changes and announcement timing, does constitute "money or property" or a "thing of value" under 18 U.S.C. §§ 1343, 1348, and 641. The convictions should be affirmed. Sullivan argued that the federal fraud statutes do not distinguish between tangible and intangible property or between government and private entities. He contended that CMS's confidential information is comparable to the misappropriated property recognized in Carpenter v. United States (The Wall Street Journal's pre-publication information) and United States v. O'Hagan (law firm client's pre-acquisition information). He distinguished Kelly v. United States and Cleveland v. United States, asserting they involved schemes to influence the government's regulatory power (e.g., allocating traffic lanes or issuing licenses), not to misappropriate its confidential property, which implicates the government's role as a property holder, not a sovereign. Sullivan stated that the government's right to exclude others from accessing its confidential information is a fundamental property right. He criticized the majority's reasoning that CMS is not a "commercial entity" and its "stock-in-trade" requirement, arguing these points contradict established precedent, including United States v. Girard (DEA informant records as "thing of value"). Sullivan also challenged the majority's deference to the government's confession of error, citing Supreme Court precedent that courts must independently examine confessed errors and that the interpretation of criminal laws is a judicial function. Finally, he deemed the concurrence's discussion of the "personal benefit" test to be improper dicta, outside the scope of the Supreme Court's remand, and incorrect on the merits, given Congress's intent to broaden the scope of securities fraud under § 1348.
Analysis:
This decision significantly narrows the scope of federal fraud and government property conversion statutes when applied to confidential government information. By distinguishing between the government's regulatory power and its proprietary interests, the Second Circuit establishes a precedent that makes it harder to prosecute individuals for schemes involving the unauthorized acquisition and use of sensitive government data, particularly if that data pertains to regulatory decisions and does not directly impact the government's financial assets. This ruling highlights a critical difference between how government entities and private businesses are treated concerning "property" for fraud purposes, potentially creating a loophole for illicit trading on non-public government regulatory information and diminishing the perceived "value" of such data. It also reaffirms the judiciary's limited role in overseeing prosecutorial discretion, even while independently reviewing confessed errors.
