Recent Developments In Insider Criminal Law - The Supreme Court’s Blaszczak Decision
On January 11, 2021, the Supreme Court, in a summary decision, vacated the important decision of the U.S. Court of Appeals for the Second Circuit in United States v. Blaszczak, and remanded the case to the Second Circuit for further consideration under the Supreme Court's recent decision in Kelly v. United States. The decision could lead the Second Circuit to reconsider its decision in two respects.
Blaszczak Decision – Two Significant Elements
The decision in Blaszczak lowered the requirements for a successful conviction under the insider trading statute on two fronts: the “personal benefit” and the “property” elements. The personal benefit test from Dirks v. SEC requires that the tipper breaches a duty of trust and confidence by disclosing confidential information to get an indirect or direct “personal benefit”. The Second Circuit in Blaszczak held that the Dirks’ personal benefit test did not apply to insider trading violations charged under the wire and securities fraud statutes in 18 U.S.C. §§ 1343 and 1348. The court's rationale for this decision is that Congress, by enacting § 1348, intended to expand the enforcement power of federal prosecutors, and therefore the personal benefit test otherwise applicable to Section 10(b) of the Securities Exchange Act does not apply to the Title 18 provisions.
Furthermore, the court held that confidential government information about proposed regulations constitutes "property" under Title 18 of the U.S. Code. The confidential government information was equated with confidential business information for which the Supreme Court in Carpenter v. United States assumed it was protected property, unlike the poker licensing issue in Cleveland v. United States. The result is that those who use such information for their own trading goals are liable for defrauding the government under that title's securities fraud and mail fraud provisions, although their actions do not meet the traditional elements of insider trading.
The Bridgegate case
Around five months after the Second Circuit’s decision in Blaszczak, the Supreme Court issued a significant decision regarding the government's property issue in connection with the George Washington Bridge Scandal ("Bridgegate") in Kelly v. United States. In the decision, the Supreme Court reversed the convictions of two New Jersey officials. The two had colluded to change traffic patterns during rush hour on the George Washington Bridge as a means of a political scheme against a mayor who declined to support the then-governor's re-election campaign.
In considering Cleveland, the Supreme Court reversed the Second Circuit's decision. The Court held that a scheme to realign toll lanes that lead to the bridge does not qualify as an effort to take government property. The alleged goal was not sufficient to show that the officials aimed to obtain “money or property”. Also, the work of the traffic engineers and toll collectors were only secondary costs of regulation instead of itself being the target of the officials' scam.
How the Second Circuit will decide is uncertain. With regard to the ownership issue, two paths are conceivable. It could be that the property issue will now be dismissed, thereby vacating the conviction. On the other hand, it could be that the Second Circuit draws a distinction between the use of regulatory power (Kelly) and the use of confidential government information (Blaszczak). In the former case, a decision on the aspect of personal benefit would probably not be made. This could pave the way for prosecutors to continue to charge securities fraud under Title 18 with more ease than would be the case in traditional Section 10(b) based actions. In the present Supreme Court decision, a step of restraining the excessive use of the federal fraud statutes has been taken. But uncertainty remains, and will likely continue through a Second Circuit decision, for all parties involved.
Julius H. F. Henneberg serves as a graduate editor of the NYU Journal of Law & Business. He is an LLM candidate at NYU School of Law where he focuses on white-collar criminal law. Julius is also a research assistant to Professor Jansenson. Prior to attending NYU he worked as an attorney at law at Hogan Lovells International LLP and finished his doctoral thesis in the area of white-collar criminal and banking law. Before that, he was a research assistant in several law firms and the Federal Ministry of Justice.