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Second Circuit Opines on Scope of Supreme Court’s Kelly Precedent for Misappropriation of Confidential Government Information

In United States v. Blaszczak,[1] the Second Circuit recently remanded a criminal conviction concerning the misappropriation of confidential information to the District Court in light of the Supreme Court’s decision in Kelly v. United States, which held that a scheme to alter “a regulatory choice is not one to appropriate the government’s property” for purposes of the wire fraud statute.[2]  The Second Circuit previously affirmed convictions against defendants David Blaszczak, Theodore Huber, Robert Olan, and Christopher Worrall for conversion of government property, 18 U.S.C. § 641, and wire fraud, 18 U.S.C. § 1343, as well as convictions against Blaszczak, Huber, and Olan of Title 18 securities fraud, 18 U.S.C. § 1348, and related conspiracy charges under 18 U.S.C. §§ 371, 1349.  The convictions all stemmed from a scheme that involved misappropriating confidential information from the Centers for Medicare & Medicaid Services (“CMS”), at which certain defendants previously worked. 

On remand, the defendants argued, and the Government agreed, that the CMS information at issue “does not constitute ‘property’ or a ‘thing of value’ within the meaning” of the relevant statues after Kelly, such that the convictions on the substantive counts should be reversed and dismissed.  The Second Circuit agreed.[3]  The Government sought affirmance on the remaining conspiracy convictions, but the Second Circuit vacated those convictions and remanded for further proceedings because the verdicts did “not reveal whether the jury found that the charged defendants conspired to engage in alleged conduct other than that which the government no longer contends was criminal.”[4]  This case is likely to have far-reaching implications for future prosecutions based on the misappropriation of government information. 

I. Background

CMS rules and regulations set reimbursement rates for healthcare providers, which in turn may impact the stock prices of various healthcare companies that offer products and services covered by those rates.  Worrall was an employee at CMS, Huber and Olan were partners at the Deerfield hedge fund, and Blaszczak was a former CMS employee who did consulting work for Deerfield.[5]  The Government alleged that, at various times between 2009 and 2014, Worrall gave Blaszczak “nonpublic information about the timing and substance of proposed CMS rule changes that would change reimbursement rates for certain types of medical care for various health conditions.”[6]  Blaszczak, in turn, fed that information to Huber, Olan, and other Deerfield partners, who then shorted companies that would be negatively impacted by these rule changes. 

At trial, the jury ultimately convicted all four defendants on at least one count of Section 641 property conversion (converting government property—the CMS information—for their benefit), as well as at least one count of Section 1343 wire fraud.[7]  Blaszczak, Huber, and Olan were also convicted on several conspiracy counts.[8]  The defendants appealed, primarily arguing that (1) the relevant fraud statutes “apply to fraudulent schemes to obtain ‘money or property’” and the government conversion statute “applies to conversion of money or a thing of value of the government,” and (2) CMS’s confidential information “was not government property or a thing of value within the meaning of those statutes.”[9]  The Second Circuit disagreed and affirmed the convictions in a published opinion on December 30, 2019.[10]  Then the Supreme Court decided Kelly, the “Bridgegate case,” where it reversed convictions for wire fraud and fraud on a federally funded entity because the conduct at issue did not deprive the government of money or property.  Following Kelly, the Blaszczak defendants petitioned for certiorari; the Supreme Court granted certiorari, vacated, and remanded for further consideration in light of Kelly.[11]

On remand, the Government agreed that, in light of Kelly, “in a case involving confidential government information, that information typically must have economic value in the hands of the relevant Government entity to constitute ‘property’ for purposes of 18 U.S.C. §§ 1343 and 1348, and to be a ‘thing of value’ under 18 U.S.C. § 641.”[12]  It argued that the conspiracy convictions against Blaszczak, Huber, and Olan could be affirmed, however, because the indictment alleged that their objectives were not only to convert government property in violation of Section 641, but also to commit Title 15 securities fraud and to defraud the United States in violation of 18 U.S.C. § 371, and, as to Blaszczak, that his objectives also included conversion of government property.[13]

II. The Majority Opinion

First, given Kelly and the prosecutorial discretion to which the Government is entitled, the Court granted the Government’s request to remand the case for dismissal of the substantive counts.[14] 

Second, the Court concluded that the confidential CMS information is not government “property” or a “thing of value” for purposes of the relevant statutes.[15]  That is, “a government agency’s exercise of regulatory power fails to meet the federal fraud statutes’ property requirement.”[16]  If CMS’s planned regulations are prematurely disclosed, that disclosure “has no direct impact on the government’s fisc,” and “the government’s right to determine ‘who should get a benefit and who should not . . . do[es] not create a property interest.’”[17] 

The Court distinguished United States v. Girard,[18] which involved a drug dealer’s attempts to purchase confidential Drug Enforcement Administration (“DEA”) records regarding DEA informants.  That confidential information was deemed a “thing of value” within the meaning of Section 641 because it “has inherent value to the DEA in investigations and preparation for prosecution” and its theft “would interfere with those operations,” unlike the CMS information at issue in Blaszczak.[19]

As to the remaining conspiracy convictions, the Court vacated and remanded because “the jury was not given questions to answer that would reveal which one or more of the alleged conspiratorial goals it found proven.”[20]  Because the conspiracy counts addressed both the Title 15 securities frauds (for which the defendants were acquitted) and the Section 641 and Title 18 frauds (for which defendants were convicted, but for which their convictions could not stand in light of Kelly), a remand was required.  Specifically, the Court explained that any error on the conspiracy counts was not harmless “[g]iven the emphasis the government placed on theft in its rebuttal summation to the jury, and the fact that the only substantive crimes on which the jury returned verdicts of guilty were the alleged [government] property crimes under § 641, § 1343, and § 1348.”[21]  The Court thus could not “infer that if there had been no charges of property crimes or conspiratorial goals to commit property crimes, the jury would necessarily have found that any of the defendants conspired to commit Title 15 securities fraud or to defraud the United States.”[22]  The Court left open the prospect of a new trial on the conspiracy counts before the District Court.[23]

III. Judge Walker’s Concurrence

Judge Walker wrote separately to “highlight an anomaly” from Blaszczak I that was not addressed by Blaszczak II because it was not “outcome determinative.”[24]  In Blaszczak I, the Court concluded that a criminal conviction for tipper-tippee insider trading, prosecuted under 18 U.S.C. § 1348, does not require proof that the tipper received a “personal benefit;”[25] by contrast, civil insider trading under Section 10(b) of the Exchange Act and SEC Rule 10b-5 does require such a showing of personal benefit.[26]  Judge Walker emphasized that “[i]t should not require fewer elements to prove a criminal conviction than to impose civil penalties for the same conduct,” and believes that this “asymmetry” merits “the further attention” of the courts and Congress.[27]

IV. Implications

In his dissenting opinion, Judge Sullivan asserted that the “only winners” in this case are “sophisticated insiders” who “will be emboldened . . . to believe that the broad proscriptions of the federal fraud statutes do not in fact mean what they say.”[28]  In the wake of this decision, it will be more challenging for the Government to pursue insider trading cases involving the misappropriation of confidential agency information and other intangible government property.  This, in turn, may lessen investigations and/or enforcement actions around this behavior. 

We will continue to monitor this case on remand to the District Court, and will also watch to see whether other Circuits follow the Second Circuit’s lead on this issue.  If they do not, a circuit split may force the Supreme Court to revisit the scope of Kelly’s “government property” or “thing of value” holdings. 

[1] --- F.4th ---, 2022 WL 17926047 (2d Cir. Dec. 27, 2022) (“Blaszczak II”). 

[2] 140 S. Ct. 1565, 1572 (2020).  That is, the fraudulent scheme was not “directed at the [government’s] property.”  Id.

[3] Blaszczak II, 2022 WL 17926047, at *1

[4] Id. 

[5] Id. at *2.

[6] Id.

[7] Id.

[8] Id.

[9] Id. (cleaned up).

[10] See United States v. Blaszczak, 947 F.3d 19 (2d Cir. 2019) (“Blaszczak I”).  Blaszczak I was heard by Judges Kearse, Droney, and Sullivan, and Judge Sullivan wrote the majority opinion and Judge Kearse dissented.  Blaszczak II was heard by Judges Kearse, Walker, and Sullivan.  Judge Kearse wrote the majority opinion and Judge Sullivan dissented.

[11] Blaszczak II, 2022 WL 17926047, at *3. 

[12] Id. at *4.

[13] Id.

[14] Id. at *5. 

[15] Id. at *10.  The Court, however, noted that as to the Title 15 securities fraud counts that were also charged—and for which the defendants were acquitted at trial—“the actual and intended victims . . . would have been investors in the market for securities of the companies whose fortunes would be affected by the regulations promulgated by CMS.”  Id.

[16] Id. at *11 (cleaned up) (citing Kelly, 140 S. Ct. at 1568-69).

[17] Id. (alterations in original) (quoting Kelly, 140 S. Ct. at 1572).

[18] 601 F.2d 69 (2d Cir. 1979).

[19] Blaszczak II, 2022 WL 17926047, at *11.

[20] Id. at *12. 

[21] Id.

[22] Id.

[23] Id. at *13.

[24] Id. (Walker, J., concurring).  Judge Kearse joined the concurrence in full. 

[25] 947 F.3d at 45.

[26] See, e.g., Dirks v. SEC, 463 U.S. 646, 662 (1983) (tipper can be liable under Rule 10b-5 where the Government has proven the tipper “(1) tip[ped] (2) material nonpublic information (3) in breach of a fiduciary duty of confidentiality owed to shareholders . . . or to the source of the information . . . (4) for personal benefit to the tipper”).

[27] Blaszczak II, 2022 WL 17926047, at *13 (Walker, J., concurring).

[28] Id. (Sullivan, J., dissenting).