Case Summary and Outcome

The United States Court of Appeals for the Second Circuit reversed its decision, after initially upholding convictions for fraud-related offenses on the basis that confidential government information constituted “property” under federal fraud statutes. This remand came after the U.S. Supreme Court’s decision in Kelly v. United States, which narrowed the definition of “property” in fraud cases, the Second Circuit reconsidered its position. The case involved a former government agency official who, after obtaining non-public regulatory information from a current official, passed it to asset management firms, leading to substantial financial gains. The Court reasoned that the government’s regulatory information did not constitute property in the same way as financial assets or tangible goods. While the Court dismissed charges premised on property fraud, it upheld the possibility of liability for conspiracy to commit other offenses, remanding those counts for further proceedings. The ruling clarified that the decision was limited to cases involving government-held non-public information and did not alter insider trading laws as they apply to private entities.

Facts

Between 2009 and 2014, David Blaszczak, a hedge fund consultant and former employee of the U.S. Centers for Medicare and Medicaid Services (CMS), obtained confidential CMS information regarding upcoming regulatory changes from former colleagues, including Christopher Worrall. Blaszczak shared this nonpublic information with Theodore Huber, Robert Olan, and Jordan Fogel—partners at Deerfield Management Company, L.P.—as well as with Christopher Plaford, a portfolio manager at Visium Asset Management, L.P. Using this inside information, the Deerfield partners made over $7 million in stock trading profits, while Plaford and Visium made approximately $330,000.

On March 5, 2018, Blaszczak, Huber, Olan, and Worrall were indicted in the U.S. District Court for the Southern District of New York. Fogel and Plaford had already entered plea deals and agreed to testify against the other defendants. The charges included securities fraud under Title 18 of the U.S. Code, wire fraud, and conspiracy. Specifically, Title 18 criminalizes obtaining money or property through false or fraudulent pretenses in connection with commodities or securities transactions. The defendants argued that confidential government information does not constitute “property” under these statutes.

On May 3, 2018, a jury acquitted the defendants of some charges but found all guilty of wire fraud. All defendants except Worrall were convicted of securities fraud under Title 18. Blaszczak was further convicted of wire fraud and Title 18 securities fraud for both the Deerfield and Visium schemes.

The defendants appealed their convictions to the U.S. Court of Appeals for the Second Circuit. Judges Droney and Sullivan delivered the majority opinion, while Judge Kearse dissented. The Second Circuit considered Supreme Court precedents, including Carpenter v. United States (1987) and Cleveland v. United States (2000). The Court distinguished the present case from Cleveland, ruling that CMS’s confidential information was property because it had economic value and was essential to the agency’s functioning, akin to the proprietary information in Carpenter. The Court concluded that confidential government information could constitute “property” under Title 18 and upheld the convictions.

While this appeal was pending, the U.S. Supreme Court decided Kelly v. United States in 2020. That ruling clarified that a fraud conviction requires that the defendant sought to obtain “money or property.” The Supreme Court held that regulatory decisions, even if fraudulently influenced, do not constitute property unless they involve a tangible loss to the government.

Following Kelly, the Blaszczak defendants sought review by the Supreme Court. The government agreed that Kelly impacted their case, leading the Supreme Court to vacate the Second Circuit’s prior decision and remand the case for reconsideration (Blaszczak II).

Decision Overview

Judge Droney delivered the judgment for the Court, with Judge Sullivan joining in the majority opinion. Judge Kearse dissented in a separate opinion. The main issue before the Court was whether confidential government information constitutes property under federal fraud statutes, particularly in the context of Title 18.

The defendants, led by Blaszczak, argued that their fraud convictions should be overturned because there was insufficient evidence to prove that they had engaged in a scheme to defraud the Centers for Medicare & Medicaid Services (CMS) of property. They relied on Cleveland v. United States, where the Supreme Court held that an unissued government license was not property because it had no economic value until issued to a private party. They contended that CMS had a purely regulatory interest in its confidential information rather than a proprietary one and that there was no financial loss suffered by CMS as a result of the leaked information. They further referenced Fountain v. United States, which suggested that monetary loss is a critical consideration in cases involving government regulation.

The government, however, argued that CMS had a property right in maintaining the confidentiality and exclusive use of its pre-decisional information. CMS maintained that unauthorized disclosure of such information could undermine its operational efficacy and force it to alter its internal processes. The Court framed the issue as the broader question of whether a government agency’s confidential regulatory information may constitute property under federal fraud statutes.

The Supreme Court’s ruling in Kelly v. United States, which clarified that fraud requires an intent to obtain money or property, prompted the Court to vacate the decision and remand the case. On reconsideration (Blaszczak II), the Second Circuit, with Judge Kearse now in the majority, reversed the defendants’ fraud convictions, determining that CMS’s predecisional regulatory information did not constitute property under the relevant statutes. The government conceded error on the substantive fraud counts, and the Court granted deference to its request for dismissal. The Court further reversed the conspiracy convictions due to jury instructions that left ambiguity over whether the convictions were based on an improper theory of property fraud.

However, the Court’s ruling in Blaszczak II did not affect liability for misappropriation of confidential business information in a private context, as established in Carpenter. Additionally, while the decision had significant implications for federal fraud prosecutions, it did not alter the scope of insider trading laws under the Exchange Act. Judge Walker, in a concurring opinion, critiqued the inconsistency between the requirements for proving criminal versus civil insider trading liability under different statutes, arguing that it undermined fundamental principles of fairness.

Judge Sullivan dissented in Blaszczak II, maintaining that the initial convictions should stand. He expressed concern that the majority’s ruling would enable insiders to exploit confidential government information for personal gain. He also criticized the concurrence’s discussion of the personal benefit requirement, arguing that it was not properly before the Court.

In summary, while Blaszczak I upheld the view that confidential government information constitutes property for the purposes of federal fraud statutes, Blaszczak II reversed course following Kelly, finding that the government’s regulatory information does not meet the definition of property or a thing of value under federal law.