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Volume X, Number 217

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Prosecutors Not Required to Prove Tipper Received “Personal Benefit” to be Convicted Under Criminal Insider Trading Statute

On December 30, 2019 the Second Circuit issued its opinion in United States v. Blaszczak, finding that the government can criminally prosecute insider trading under 18 U.S.C. 1348 without proving personal benefit to the tipper, making it easier to prosecute trading on inside information.  

Prior to the Blaszczak ruling, it was unclear whether judicial precedent in insider trading cases brought under the Securities Exchange Act of 1934, Section 10(b) and SEC Rule 10b-5 (referred to herein as Title 15), would apply to cases brought under the newer securities fraud law found in Title 18, which applies to registered securities. Under Title 15, prosecutors had to prove, among other things, that insiders received some form of “personal benefit” in exchange for their tips. In certain circumstances, demonstrating this element beyond a reasonable doubt has proven difficult for prosecutors.

Now, prosecutors can end-run Title 15’s personal benefit requirement by charging an alleged tipper insider under Title 18 as opposed to Title 15.     

Christopher Worrall, a then-employee of the Centers for Medicare and Medicaid Services (“CMS”), allegedly provided nonpublic information about pending changes in CMS reimbursement rates to friend and former CMS Employee, David Blaszczak. In turn, Blaszczak, who worked as a consultant, passed the information to analysts at Deerfield Management Company, L.P, who then profitably traded on the information. Although Blaszczak received monetary compensation from Deerfield through a consulting agreement, Worrall did not receive any money. Worrall was alleged to have received sports tickets and free meals. 

Prosecutors brought charges under Titles 15 and 18, arguing that under the latter it need not prove that Defendants received a personal benefit. The trial court agreed and instructed the jury in accord. The defendants were acquitted of the Title 15 charges but convicted on the Title 18 charges.

On appeal, the defendants argued, in part, that the district court erred by not applying the personal benefit requirement to Title 18 securities fraud. The panel in Blaszczak disagreed, opining that Section 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[.]” The panel added that it declined to “graft” the “personal-benefit test onto the elements of Title 18 securities fraud[.]”  The Court also found that confidential government information like that passed by Worrall may constitute “property” for purposes of securities fraud.

The decision in Blaszczak may have certain unintended consequences. In cases involving registered securities, it seems unlikely that prosecutors will continue to bring charges under Title 15, when they can bring charges under Title 18 without having to prove the existence of a “personal benefit.” Moreover, it creates the paradoxical circumstance where an individual could be found criminally liable for insider trading under Title 18, but escape civil liability because the Securities and Exchange Commission still must demonstrate that the tipper received a “personal benefit” under Title 15. 

Click here to view the Second Circuit’s complete opinion in United States v. Blaszczak

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume X, Number 9


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Andrew T. Fox Phoenix Polsinelli Government Investigations Labor and Employment Commercial Litigation Litigation and Dispute Resolution

As a member of Polsinelli’s Government Investigations practice, Andrew assists clients in all aspects of white collar criminal defense and internal corporate investigations. Working to understand each client’s unique situation, he helps guide clients through government inquiries and provides counsel that aligns to their business strategies. Andrew has experience drafting briefs, memoranda and responding to discovery requests.

Prior to joining Polsinelli, Andrew served as a law clerk to The Honorable Judge Douglas L. Rayes on the United States District Court for the District of...

Paul Roshka, Polsinelli, financial securities lawyer

Known for his thorough preparation and persistence, Paul Roshka has a national practice representing companies, their directors, officers, and employees during investigations and enforcement/disciplinary proceedings involving potential violations of the federal and state securities laws, and other financial regulatory statutes and rules. He has handled matters initiated by almost every SEC Regional Office and FINRA District Office, and their Home Offices in Washington, D.C.

He is also a recognized bet-the-company litigator. Paul has defended securities/financial claims in federal and state court, including class action defense. He is a seasoned litigator trusted to resolve our clients’ disputes. Paul and the lawyers he supervises know it is important to keep clients informed, and provide value for the services they render. He handles arbitrations and mediations nationwide. He also serves as a mediator in securities and complex matters involving real estate and other financial claims.

Paul’s passion for resolving complex disputes is equally matched by his passion for positively impacting his community. He has spearheaded numerous significant charitable efforts that have directly and positively impacted the lives of thousands of Arizona children and families. He is a Chairman Emeritus of Phoenix Children’s Hospital, a Past Chairman of the Hospital’s Foundation, Past Chairman of the Children’s Cancer Center and Past Chairman of Phoenix Suns Charities. Paul has served on the Boards of the Salvation Army and Xavier College Preparatory School.  Paul is currently on the Board of Southwest Human Development, an organization that seeks to create a positive future for every child. 

T.J. Mitchell Commercial Litigation Lawyer Polsinelli Law Firm

Thomas (T.J.) Mitchell is an associate in the Commercial Litigation practice group. T.J. partners with Polsinelli’s seasoned attorneys to provide litigation solutions in complex financial and business disputes, manage clients’ risk, and allow clients to focus on driving their business or personal objectives. Drawing from his experience working in the legal department of a large technology company, T.J. understands what clients expect from their outside counsel or personal attorney and takes the time to understand their unique challenges, goals, and values. These priorities shape his work...