Friday, December 25, 2020
With so much recent controversy and uncertainty surrounding the personal benefit test for tipper-tippee liability pursuant to Section 10b insider trading liability (see, e.g., here, and here), prosecutors have recently looked to other statutory bases for obtaining convictions. As part of the Sarbanes-Oxley Act of 2002, Congress enacted 18 U.S.C. § 1348, Securities and Commodities Fraud. This general anti-fraud provision provides that:
Whoever knowingly executes, or attempts to execute, a scheme or artifice…[t]o defraud any person in connection with…any security…or [t]o obatain, by means of false or fraudulent pretenses, representations, or promises, any money or property in connection with the purchase or sale of any…security… shall be fined under this title, or imprisoned not more than 25 years, or both.
While the language of §1348 is similar to Section 10b, relatively few insider trading cases have been brought under it. It looked as though this might, however, be changing in the wake of a recent Second Circuit decision holding that the controversial personal-benefit test does not apply to tipper-tippee actions brought under §1348. In United States v. Blaszczak, 947 F.3d 19 (2d Cir. 2019), the court held that §1348 and Section 10b were adopted for different purposes. According to the court, “Congress enacted [Section 10b’s] fraud provisions…with the limited ‘purpose of eliminate[ing] [the] use of inside information for personal advantage,” and the personal benefit test is consistent with this purpose. Id. at 35. By contrast, §1348 was adopted “to overcome the ‘technical legal requirements’ of [Section 10b],” so the personal-benefit test should not be read into the latter’s elements. Id. at 36-37. The Blaszczak decision raised a number of important questions. See, e.g., Karen E. Woody, The New Insider Trading, 52 Arizona State L. J. 594 (2020). For example, going forward, why would a prosecutor ever bring a tipper-tippee case under Section 10b if they can simply bypass the personal-benefit element by bringing it under §1348? Commentators have also noted the problem that the test for criminal insider trading liability under §1348 (with a maximum penalty of 25 years imprisonment) is easier to satisfy under the Blaszczak rule than the test for civil liability (which must be brought under Section 10b because the SEC has no enforcement authority under §1348).
Highlighting these and other concerns, the Blaszczak defendants petitioned the Supreme Court for writ of certiorari in September 2020. In an unusual move, the government responded by asking the Court to grant the petitioners’ writs, vacate the Second Circuit’s decision, and remand the case for consideration in light of the Court’s recent wire-fraud decision, Kelly v. United States, 140 S.Ct. 1565 (2020). In Kelly, the Court held that “a scheme to alter ... regulatory choice is not one to take the government’s property.” Id. at 1572. Since the defendants in Blaszczak tipped and traded on confidential government information concerning proposed medical treatment reimbursement regulations, the government conceded that the Second Circuit should revisit the question of whether such regulatory information is “property” for purposes of a § 1438 prosecution after Kelly. The government only proposed a remand on the limited issue of what constitutes “property,” not on the question of whether the personal benefit test applies to insider trading prosecutions under § 1348. Nevertheless, if the Court vacates Blaszczak, then the Second Circuit’s controversial personal benefit holding will no longer be law unless it is embraced on remand or in some other case. See, e.g., Robert J. Anello & Richard F. Albert, Days Seem Numbered for Circuit's Controversial Insider Trading Decision, 264 New York Law Journal (Dec. 9, 2020).