Expansion of additional avenue to prosecute Wall Street insider trading

A recent Second Circuit ruling provides additional ammunition to prosecutors in insider trading cases.  In the decision in U.S. v. Blaszczak, a three-judge panel rejected the idea that thirty-five years of rulings in insider trading cases brought under section 10(b) of the Securities and Exchange Act should apply to cases brought under a newer securities fraud law under Title 18, enacted in 2002.

As a result, prosecutors in insider trading cases may have an easier time proving their cases.  Neither statute explicitly prohibits insider trading but proceeding under the Exchange Act has been the traditional route.  Under the U.S. Supreme Court’s 1985 decision in S.E.C. v. Dirks, prosecutors pursuing Exchange Act claims had to prove that the insiders received some “personal benefit” in exchange for tips they passed to traders.  Recent Second Circuit rulings complicated that requirement. The Blaszczak case was seen as a test case for a way around the existing case law.

The lead defendant, David Blaszczak, had worked for the Centers for Medicare & Medicaid Services (CMS) before becoming a consultant. In that role, prosecutors said he passed information about pending changes in CMS reimbursement rates to hedge funds Deerfield Management Co. LP and Visium Asset Management LP.

Blaszczak and others were acquitted on the Exchange Act counts but convicted of insider trading under section 1348.  On appeal, they argued that the rules that apply to insider trading cases under the Exchange Act should similarly apply to cases brought under Title 18.  But the panel majority disagreed, giving prosecutors a green light to charge under the newer law without having to confront the additional challenges associated with Exchange Act claims.

Considering that 18 U.S.C. § 1348 “was intended to provide prosecutors with a different — and broader — enforcement mechanism to address securities fraud than what had been previously provided in the Title 15 fraud provisions, we decline to graft the Dirks personal-benefit test onto the elements of Title 18 securities fraud,” the majority wrote.  This ruling helps make Title 18 securities fraud a more powerful alternative to prosecutors in insider trading cases.

The case is U.S. v. Blaszczak et al., case number 18-2811, in the U.S. Court of Appeals for the Second Circuit.