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A Fresh Take

Insights on M&A, litigation, and corporate governance in the US.

| 4 minutes read

“Bridgegate’s” Shadow: US Department of Justice Asks Second Circuit to Reverse Insider Trading Conviction After Supreme Court Rules in Kelly v. US

Earlier this month, the US Attorney’s Office for the Southern District of New York (SDNY) filed an unusual appellate brief in which the prosecutors stated that the SDNY “is constrained to confess error at the direction of the Solicitor General’s Office” and requested that the US Court of Appeals for the Second Circuit set aside multiple fraud- and conversion- related convictions in United States v. Blaszczak, a high-profile and hard-fought insider trading prosecution.  The SDNY’s brief suggests that there may be differing views within the US Department of Justice (DOJ) regarding insider trading cases based on the misappropriation of confidential government information.  The surrender was far from complete, however; the SDNY’s brief takes the position that such conduct remains subject to “Klein conspiracy” charges for defrauding the US government pursuant to 18 U.S.C. § 371.   

More broadly, this retreat represents a setback in DOJ’s recent campaign to deploy novel legal theories in prosecutions of financial fraud, market manipulation, and other white-collar crimes.  Some of these theories have enjoyed success; others, like Blaszczak, have been thrown back; still others remain untested.  It will be worth watching how DOJ continues to formulate and pursue new applications of longstanding criminal law, especially under new leadership during the Biden Administration.

Insider Trading

The Blaszczak case initially made waves in December 2019 when (as we noted in a client briefing) the Second Circuit ruled that confidential information held by a government agency may constitute “property” and, thus, that the misappropriation of such information can support a conviction under federal securities or wire fraud statutes that, in contrast to Rule 10b-5 charges, do not require a showing that the tipper received a “personal benefit” from the scheme.  In an earlier blog post, we discussed how this legal theory took a hit when the US Supreme Court ruled unanimously in Kelly v. US that New Jersey state government officials had not misappropriated government property when they allocated the access lanes for the George Washington bridge for political purposes.  (Kelly held that, to support a Title 18 fraud prosecution, the “property,” e.g., information with economic value, must be the “object of the fraud” against the government.)  As a result of Kelly, the Supreme Court remanded Blaszczak to the Second Circuit in January, where it remains. 

In its brief on April 2, the SDNY prosecutors noted that the Second Circuit’s 2019 Blaszczak decision had concluded that the Centers for Medicare & Medicaid Services, or CMS (a US government agency), had an “economic interest in its confidential information” regarding an upcoming ruling on the reimbursement rates for certain radiation oncology treatments.  The Second Circuit’s conclusion was based on the fact that CMS employee time and resources had gone into preparing that information and therefore, the court further held, the Title 18 wire fraud and securities fraud statutes were violated when the confidential information was leaked to individuals who used it to trade in the securities market.  The SDNY’s recent brief squarely acknowledges that “the CMS employee time at issue in this case did not constitute ‘an object of the fraud,’” as required by Kelly.  The decision to retreat rather than attempt to distinguish Kelly, as well as the unusual framing — that the SDNY “is constrained to confess error at the direction of the Solicitor General’s Office” — suggests that the Solicitor General’s Office, perhaps over objections from others within DOJ, has decided to engage in damage control rather than risk another defeat in the Supreme Court.

Importantly, the SDNY does not concede that the Blaszczak defendants are all free to go.  Three of the four defendants were also convicted of conspiring to defraud the US government by misappropriating CMS’s information.  The SDNY argues that these convictions, for violating 18 U.S.C. § 371, can and should be affirmed. 

The Bigger Picture

In recent years, DOJ has increasingly brought white-collar criminal cases based on novel and sometimes aggressive applications of longstanding criminal laws.  Notwithstanding the rare retreat in Blaszczak, this trend seems likely to continue: as we explored elsewhere, the new DOJ under President Biden is expected to bring a renewed vigor to financial and corporate-crime cases.  Examples include:

  • Blaszczak itself, which was a major win for DOJ in 2019, and other prosecutions of insider trading.  In a noteworthy and distinct aspect of Blaszczak, the Second Circuit held that, in insider trading cases charged as violations of Title 18 fraud statutes, DOJ did not need to show that the tipper / insider had received a “personal benefit” from the scheme.  This was a departure from the law of insider trading developed under the SEC’s Rule 10b-5 (which had historically required a “personal benefit” to incur liability), and potentially points to more aggressive prosecutorial use of Title 18 in future insider trading cases.  The SDNY’s concession in Blaszczak does not foreclose this possibility.  In cases where prosecutors are not “constrained” by the Solicitor General’s Office, they may be less risk averse, and more willing to argue that Kelly should be distinguished.
  • United States v. Ho, a December 2020 case that we analyzed in detail, saw the first-ever appellate decision confirming DOJ’s theory that money-laundering charges under 18 U.S.C § 1956(a)(2) may be upheld based solely on the use of US correspondent banking.  That case represented a potentially major expansion of US law to reach conduct that occurs outside of the United States.
  • A pending Racketeer Influenced and Corrupt Organization Act (RICO) prosecution involving the first-ever use of alleged spoofing (a form of market manipulation prohibited by Dodd-Frank) as the basis of RICO charges.


It remains to be seen whether the Second Circuit will affirm the Blaszczak defendants’ convictions on the basis of 18 U.S.C. § 371.  It is also unclear whether the Second Circuit will open the door to future insider trading prosecutions based on the misappropriation of confidential government information by (for example) identifying potential distinctions between Blaszczak and Kelly.  In all events, US v. Blaszczak will continue to be worth watching. 


investigations, white-collar defense, litigation, capital markets and securities, financial institutions, financial crime, market abuse