Insider-trading prosecutions just got easier

A court ruling makes it much easier to bring insider-trading cases in situations where the information passed through intermediaries.
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Prosecutors have a stronger hand going after insider trading after a court ruling lowered the bar for bringing cases.

The federal appeals court in Manhattan said the government may pursue insider-trading charges under a newer securities-fraud law not subject to a key requirement of the statute prosecutors traditionally use. The change will make it much easier to bring cases, particularly against those who trade on illegal tips passed to them indirectly and who may not know the source personally.

“It opens a very wide door for prosecutors,” said Peter Henning, a law professor at Wayne State University and a former federal prosecutor.

This week’s 2-1 ruling upheld the insider-trading convictions of consultant David Blaszczak and other men under securities-fraud provisions of the 2002 Sarbanes-Oxley Act. The men argued for the verdicts to be tossed in part because prosecutors failed to show the supplier of the illicit information received a “personal benefit” such as cash.


The U.S. Supreme Court has long required that prosecutors bringing cases under the 1934 Securities Exchange Act prove that insiders get such a benefit. A 2014 decision by the same federal appeals court throwing out insider-trading convictions of fund managers Todd Newman and Anthony Chiasson raised the bar even higher by requiring prosecutors to show the recipient of the information knew the tipper was benefiting.

That proved a major hurdle in cases where the information passed through intermediaries. Manhattan federal prosecutors dropped insider-trading charges against more than a dozen people after the Newman decision.

But the appeals court said Monday that the personal-benefit requirement did not apply to the newer law, which groups insider trading with wire and mail fraud under Title 18 of the U.S. criminal code, as opposed to Title 15 for Exchange Act cases.

Lawyers for Blaszczak and his co-defendants haven’t said whether they’ll ask to have the case reheard by the court or try to appeal to the Supreme Court. They didn’t return messages seeking comment.

“It would be good if the Supreme Court takes it up because it’s such an important issue,” said Brian Jacobs, a former federal prosecutor in Manhattan now in private practice at Morvillo Abramowitz Grand Iason & Anello.

Lawyers for Blaszczak urged the court to apply the personal-benefit requirement to Title 18 prosecutions so the elements of insider-trading cases would remain consistent across the law. They warned the government would simply bring charges under Title 18 instead of Title 15.

But the judges said there were many areas where the federal criminal laws overlapped, and noted that it was not their role to favor one kind of case over another.

“Congress was certainly authorized to enact a broader securities-fraud provision, and it is not the place of courts to check that decision on policy grounds,” the court said.

Wayne State’s Henning said the defense lawyers’ prediction was likely correct. “If I’m a federal prosecutor in Manhattan, I’m going to steer clear of Title 15 in the future,” he said.

The Blaszczak opinion was written by Judge Richard Sullivan, who was appointed to the appeals court by President Trump in 2018. He was joined by Christopher Droney, an appointee of President Obama. Judge Amalya Kearse, who was named to the court by President Carter, dissented but not because of the personal-benefit issue.

The 55-page opinion was issued five weeks after the judges heard argument in the case and before Droney’s planned retirement from the bench this month to reenter private practice. The law firm Day Pitney announced Thursday that Droney joined its Hartford office as a litigation partner.

The ruling also broadens the type of information prosecutors can target. The Blaszczak case was somewhat different from most insider-trading prosecutions because it revolved around government rather than corporate secrets. Blaszczak, the one-time “king of political intelligence,” is a former Medicare official who shared tips from an ex-colleague about planned changes to reimbursement rates.

The men argued that the government information at issue couldn’t be considered “property” under federal fraud laws in the same manner as corporate information. The majority said it could be, although Kearse agreed with the defendants in her dissent.

Blaszczak was found guilty in May 2018 after a trial in Manhattan, along with his source inside the government, Christopher Worrall, and two partners at the hedge fund firm Deerfield Management, Robert Olan and Theodore Huber, who traded health-industry stocks on the tips. Blaszczak received a one-year jail term. Worrall was sentenced to 20 months, and Olan and Huber each got three years.

Deerfield, which paid Blaszczak about $1 million in fees, used the information to make more than $3.5 million in profit, prosecutors said. The firm agreed in 2017 to pay $4.6 million to settle Securities and Exchange Commission claims that it failed to properly supervise employees, without admitting or denying the allegations.