February 5, 2020

Second Circuit Paves Easier Route to Prosecute Disclosure of Agency Information, Insider Trading

Holland & Knight Alert
Jonathan N. Halpern


  • A recent U.S. Court of Appeals for the Second Circuit decision holds that the Centers for Medicare & Medicaid Services (CMS) pre-announcement rule on rate reimbursement is "property" for wire fraud and securities fraud.
  • The Second Circuit held that internal information of a government agency, not a private company, could support insider trading and other fraud prosecutions.
  • The court also ruled that "personal benefit" is not required for an insider's conviction of securities fraud under Title 18.
  • The absence of actual knowledge that the source was an agency insider is not a defense with proof of conscious avoidance.

In a ruling with far-reaching implications, the U.S. Court of Appeals for the Second Circuit recently held that pre-announcement information at the Centers for Medicare & Medicaid Services (CMS) about reimbursement rates constituted government "property" and a "thing of value." As a result, in the court's view, the unauthorized disclosure of the "predecisional information" could support convictions of wire fraud, securities fraud and conversion — and conspiracy to commit those crimes.

In United States v. Blaszczak et al.,1 decided Dec. 30, 2019, a split panel of the Second Circuit also upheld insider trading convictions based on the general securities fraud statute in Title 18 without proof of a "personal benefit" — a requirement that the U.S. Supreme Court imposed in 1983 for insider trading convictions under Title 15. Under the Supreme Court's seminal opinion in Dirks v. SEC,2 an insider could be convicted for tipping material nonpublic information (MNPI) only if prosecutors proved that the tip was made in exchange for a personal advantage, in violation of the insider's duty of trust and confidence. Moreover, in contrast to typical insider trading cases where the MNPI belongs to a commercial business, in Blaszczak, the inside information — a proposed rule on reduced rate reimbursements — belonged to the CMS, a government regulatory agency.3 Although the agency measure did not target particular companies, it did have predictable consequences. As the court determined, the traders from an investment management firm used the pre-announcement information to obtain an "illegal market edge" by shorting the stock of companies that they understood would suffer from CMS' action.4

Earlier this week, the two traders asked the Second Circuit for a rehearing en banc — a review by the full appellate court — asserting that the "property" rulings "defy" Supreme Court precedent and would create an "extraordinary expansion of federal criminal liability" and "threatens intolerable consequences" for whistleblowers, journalists and others who seek to disclose government misconduct.5 They also argued that the court's ruling eliminating the "personal benefit" requirement upended "the boundary between innocent and fraudulent trading" and "would radically expand insider-trading proscriptions."6

The breadth and reasoning of the court's ruling could have significant implications for hedge funds, investment advisers, healthcare systems and pharmaceutical companies, as well as consulting firms handling health, financial, environmental and transportation issues — any entity or individual receiving information originating from a government agency that may be nonpublic. Although the free flow of information in securities and other markets can be desirable, the expansiveness of the Second Circuit's opinion will likely extend exposure for fraud and embezzlement, at least in the eyes of prosecutors, to those who may be privy to and act on a regulator's deliberations or other agency information that has not yet been publicly released.

Overview of the Alleged Schemes and Charges

The appellate issues in this U.S. District Court for the Southern District of New York prosecution arise from conduct involving the unauthorized disclosure — and down-the-chain tipping — of confidential CMS information about modifications in the reimbursement rate for certain medical treatments.7 According to the government's trial evidence, Blaszczak, a "political intelligence" consultant for hedge funds and former CMS employee, worked his connections at CMS to obtain inside confidential information about: 1) a new agency rule reducing the reimbursement rate for certain radiation oncology treatments, and 2) the release date of the new rule. Blaszczak then tipped hedge fund managers, who profited after shorting the stock of companies that they expected would see their pay reduced as a result of the anticipated agency action.8

A raft of overlapping fraud-related charges followed: conspiracy, wire fraud, conversion and two parallel sets of insider trading charges, under Title 15 and Title 18. Parties along the information chain were charged — the CMS insider, the tipping consultant and the tipped (and trading) hedge fund managers. All defendants were acquitted of the counts alleging securities fraud under Title 15 (requiring proof of personal benefit and knowledge of the benefit), but convicted of the Title 18 substantive charges (wire fraud, conversion and securities fraud) and conspiracy, except the CMS insider, who was acquitted of the Title 18 securities fraud and conspiracy counts.9 The Second Circuit affirmed all the convictions.10

CMS Information as "Property" and a "Thing of Value"

In an expansive ruling, the majority panel held that CMS' confidential information (on rule rates and timing) constituted both "property" and a "thing of value," under the wire fraud/securities fraud and conversion statutes of Title 18.11 In doing so, the Second Circuit rejected the defendants' argument, based on two Supreme Court decisions, that property does not apply to information of an agency in which it holds only a "purely regulatory" interest.12

In a highly analytical dissent, Judge Amalya Kearse argued that because CMS, a regulatory agency, is not in the business of selling services or products, a regulation that CMS proposes could not be regarded as a "thing of value," even if the agency desired to maintain confidentiality.13 Distinguishing Carpenter v. United States,14 on which the majority relied, the dissent maintained that, unlike the property right that The Wall Street Journal held in its confidential business information before publication, "information is not CMS's 'stock in trade.' "15 Moreover, the dissent argued that, in contrast to a newspaper's interest, CMS' core mission is regulating, and a breach of agency confidentiality should not affect the agency's ability to schedule the announcement of a new rule.

The dissent further distinguished United States v. Girard,16 which involved the attempted purchase of records identifying informants of the U.S. Drug Enforcement Administration (DEA). Judge Kearse maintained that, in contrast to CMS' "desire for predecisional confidentiality" in issuing regulations, confidential information regarding the identities of informants and cooperators goes to the core mission of the DEA — law enforcement — and clearly constitutes a "thing of value" to the DEA.17

In identifying "property" in Blaszczak, the Second Circuit reached for additional factors, beyond those that the Supreme Court identified in Cleveland v. United States,18 in which the court ruled that a state-issued gaming license was not "property." There, the Supreme Court held that the 1) license held economic value only after it was issued, and 2) state's regulatory duties in issuing licenses were those of a "sovereign," not a "property holder."19 Prophetically, the Supreme Court cautioned that the government's position on "property rights" "stray[ed] from traditional concepts of property" and encouraged a "sweeping expansion of federal criminal jurisdiction . . . ."20 The Supreme Court subsequently reaffirmed the principle that the "purely regulatory" interest in selecting licensees could not implicate a state property interest.21

By contrast, in Blaszczak, the Second Circuit was apparently unconcerned about overreaching criminal jurisdiction, concluding that CMS' "right to exclude" the public from its nonpublic "predecisional information" was sufficient to satisfy the "ordinary" definition of property: "something of value" in the possession of the property holder (here, CMS).22 Maintaining that its ruling reflects the conventional approach, the court went on to pronounce, generally, that "confidential government information may constitute government 'property' " to support prosecution of wire fraud and securities fraud under Title 18.23

The issue of whether, and to what extent, agency conduct constitutes "property" for purposes of wire fraud continues to be a subject of judicial consideration. In the "Bridgegate" case currently before the Supreme Court, New Jersey state officials were convicted of wire fraud and related crimes for their roles in commandeering lanes on the George Washington Bridge to create a major traffic jam and punish the Fort Lee, New Jersey, mayor as political payback for purportedly refusing to endorse the governor.24 Thus, whether an abuse of power, such as the diversion of government resources for a political vendetta, constitutes "property" for wire fraud is an issue that the Supreme Court is expected to address. As Justice Elena Kagan reportedly observed at the recent oral argument: "[t]he object of this deception was not to obtain property."25

Nonetheless, companies that use government data or other information — whether concerning agency rules, regulations, deliberations or anything else — would be well advised to carefully vet the source of the information that they seek to obtain — whether directly, by a consultant or otherwise.

Personal Benefit

In rejecting the Dirks "personal benefit" test as a requirement of Title 18 securities fraud, the Second Circuit first determined that it was not an element of either the Title 15 or Title 18 fraud provisions.26 Rather, the "judge-made doctrine" — the court's term for the "personal benefit" test — was created to eliminate " '[the] use of insider information for personal advantage' " while maintaining the statutory objective of "protect[ing] the free flow of information into the securities markets."27 Under the Dirks doctrine, tipping MNPI constituted a breach of the insider's duty and was thus actionable as securities fraud only if it was done for a personal benefit; similarly, a tippee would be criminally liable if he used the inside information "knowing that it had been obtained in breach of the insider's duty."28 Thus, the kind of tipping required for the crime of securities fraud was distinguished from the unauthorized disclosures that a whistleblower might make — for example, to uncover a fraud.

In Blaszczak, the Second Circuit dismissed the "personal benefit" requirement under both Title 15 and Title 18, even though a "scheme to defraud" was common to both insider trading prohibitions.29 In doing so, it relied on a broad application of embezzlement, extending beyond money and property. The court asserted first that fraud encompasses "embezzlement" — " 'the fraudulent appropriation to one's own use of the money or goods entrusted to one's care by another.' "30 While noting that "[t]he undisclosed misappropriation of confidential information, in breach of a fiduciary or similar duty of trust and confidence, 'constitutes fraud akin to embezzlement,' " the court did not address the circumstances under which misappropriating information would constitute a breach of duty.31 In leapfrogging over the issue of duty breach, the court simply concluded that liability ensues from the mere unauthorized disclosure of an agency's confidential information.

The Second Circuit readily acknowledged that the Supreme Court in Dirks rejected the government's claim that the insider's tipping (i.e., the unauthorized disclosure of confidential information) constituted a breach of duty because there was no "personal benefit."32 However, viewing the "personal benefit" test in Dirks as derived from the specific objectives of the securities laws, the court in Blaszczak looked instead to what it viewed as a broader scope of securities fraud under Title 18. Accordingly, the court turned to the embezzlement theory of fraud under Carpenter, which applied to money or goods, but did not address information.33 In adopting Carpenter's embezzlement theory, the Second Circuit went further, extending the principles to agency information. The court's reasoning, in essence: an insider who misappropriates confidential agency information has committed embezzlement, which necessarily encompasses a breach of duty; because embezzlement in turn necessarily encompasses fraud no additional breach of duty is required. Accordingly, the Second Circuit refused to require a "personal benefit" for securities fraud under Title 18, and it upheld the convictions.34

Conscious Avoidance

The defendants' contention that it was improper for the trial court to give a "conscious avoidance" instruction to the jury also was unavailing.35 A jury may consider that legal substitute for the element of actual knowledge when " 'the defendant was aware of a high probability of the fact in dispute and consciously avoided confirming the fact.' "36 Here, the court readily found that even if the defendants had not been "explicitly" told that the source of the information was a CMS insider, a witness had testified that the message was "implied or obvious" in light of the context.37 Testimony about discussions among the defendants of the potential harm to the agency from the disclosure further supported the instruction.38

The increasingly common use of the "conscious avoidance" jury instruction, especially concerning the source of confidential information, can serve as a cautionary flag for any commercial enterprise or executive who seeks to obtain or incorporate expert or government agency information in formulating or carrying out business plans.


The court's ruling that "predecisional" agency information constitutes confidential "property" whose unauthorized disclosure can support wire and securities fraud under Title 18 raises particular concerns. Hedge funds, financial advisors, companies in regulated industries, consultants and their clients would be well advised to heed the implications of the Blaszczak ruling. That insiders —whether agency or corporate — and their tippees who trade on the tips can be criminally liable for securities fraud (under Title 18) even in the absence of a "personal benefit" should give pause to seeking acting on such information. Moreover, especially in light of the law on "conscious avoidance" and its frequent — in lieu of actual knowledge — any company executive or business that relies on expert or government agency information should consider rechecking its compliance controls and enhancing its due diligence regarding the origin, nature and release of third-party information.    


1 United States v. Blaszczak, No. 18-2811, 2019 WL 7289753 (2d Cir. Dec. 30, 2019).

2 Dirks v. SEC, 463 U.S. 646 (1983).

3 Blaszczak, at *8.

4 Id. at *2.

5 Joint Petition for Rehearing or Rehearing En Banc, 18-2811(L) (2d Cir. 2020), filed Feb. 3, 2020, at 1-2.

6 Id. at 2-3.

7 Id.

8 See id. at *3.

9 Id. at *3-4.

10 Id. at *17.

11 See id. at *8, *12.

12 Id. at *5.

13 Id. at * 18 (Kearse, J., dissenting)

14 Carpenter v. United States, 484 U.S. 19 (1987).

15 Blaszczak, at *18 (Kearse, J., dissenting) (citing Carpenter, 484 U.S. at 26).

16 United States v. Girard, 601 F.2d 69 (2d Cir. 1979).

17 Blaszczak, at *18 (Kearse, J., dissenting) (citing Girard, 601 F.2d at 71).

18 Cleveland v. United States, 531 U.S. 12 (2000).

19 Id. at 23-24.

20 Blaszczak, at *18 (Kearse, J., dissenting) (quoting Cleveland, 531 U.S. at 24).

21 Pasquantino v. United States, 544 U.S. 349, 357 (2005).

22 Blaszczak, at *7-8.

23 Id. at *8.

24 See generally Kelly v. United States, No. 18-1059 (U.S.).

25 Transcript of oral argument at 58:4-5, Kelly v. United States (Jan. 14, 2020) (No. 18-1059).

26 Blaszczak, at *8.

27 Id. (quoting Dirks, 463 U.S. at 662) (emphasis added to Dirks).

28 Id. at *8 (citing United States v. Newman, 773 F.3d 438, 447-49 (2d Cir. 2014), abrogated on other grounds by Salman v. United States, 137 S. Ct. 420 (2016).

29 Id. at *8.

30 Id. (quoting Carpenter, 484 U.S. at 27).

31 Id. (quoting United States v. O'Hagan, 521 U.S. 642, 654 (1997)) (citing United States v. Chestman, 947 F.2d 551, 566-67 (2d Cir. 1992) (en banc)).

32 Id. (citing Dirks, 463 U.S. at 662-64).

33 Id. at *9.

34 Id.

35 See id. at *14.

36 Id. (quoting United States v. Goffer, 721 F.3d 113, 126 (2d Cir. 2013)).

37 Id.

38 Id.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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