On January 11, 2021, the Supreme Court vacated the Second Circuit’s controversial decision in United States v. Blaszczak, which held that proof of a benefit to the tipper is not a required element for criminal insider trading claims brought under Title 18 of the U.S. Code. Although the Supreme Court ordered reconsideration on other grounds— whether certain government information may be considered “property” for the purpose of a scheme to defraud—the impact on the insider trading decision may be the more significant consequence. 

The Second Circuit’s Decision in United States v. Blaszczak

As we discussed in a past client memorandum, in 2019 the Second Circuit in United States v. Blaszczak expanded insider trading liability by affirming the convictions of four individuals of wire fraud, securities fraud, and conversion charges under Title 18. The government charged the defendants—a government employee, a consultant, and two hedge fund analysts—with violating both Title 15 and Title 18 of the U.S. Code. The jury acquitted the defendants under Title 15, which is the traditional basis to charge insider trading, but convicted on certain Title 18 counts. [1] On appeal, one of the defendants’ arguments was that the District Court wrongly instructed the jury that an element that applied under Title 15 did not apply under Title 18: that the tipper disclosed information for a “personal benefit” that was known to the recipients of the tip.

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On December 30, 2019, the United States Court of Appeals for the Second Circuit affirmed the convictions of four individuals charged with disclosing and trading on nonpublic government information, adding a new twist to decades of judicial precedent on the definition of insider trading. See United States v. Blaszczak. [1] The court held that the “personal-benefit” test for insider trading established by the Supreme Court in Dirks v. SEC [2] does not apply to wire and securities fraud under Title 18 of the U.S. Code. Additionally, the court held that confidential government information constitutes “property” for the purposes of federal fraud statutes. The ruling will make it easier for the government to prosecute insider trading even when there is no clear benefit to the source who provided the information.

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On Friday, November 1, 2019, the Supreme Court granted certiorari in Liu v. Securities and Exchange Commission, [1] a case that challenges the SEC’s long-held position that it has authority to seek disgorgement for securities laws violations as a form of equitable relief. This view has come under fire since Kokesh v. Securities and Exchange Commission, in which the Supreme Court held that disgorgement constituted a “forfeiture” or “penalty,” rather than a remedial tool, and was therefore subject to a five- year statute of limitations. As we noted previously, several justices observed during oral argument in Kokesh that the SEC did not have express statutory authority to seek disgorgement in district court actions, and the Kokesh opinion affirmatively stated that the Court was reserving judgment on the question of whether the SEC had the authority to seek disgorgement at all. These statements signaled an invitation for a challenge to the SEC’s disgorgement authority. With the grant of certiorari in Liu, the Court appears ready to address the issue directly. Any decision that further restricts the SEC’s ability to obtain disgorgement could have major ramifications for the SEC’s enforcement efforts. (more…)