Second Circuit Allows Insider Trading to Be Proven Without Personal Benefit

A recent decision issued by the Second Circuit Court of Appeals could have important implications on the scope of insider trading liability and may make it easier for criminal prosecutors to bring such cases. The prohibition on insider trading under federal law has been developed, not by statute, but by judicial decisions interpreting the application of general anti-fraud statutes to forms of insider trading. In interpreting Section 10(b) of the Securities Exchange Act (Title 15 securities fraud), courts have required the government to prove that the tipper received some form of personal benefit and that the trader (who is sometimes a step or two removed from the insider) was aware of the personal benefit. These requirements have been difficult for the government to meet and have served as a limitation on the government’s ability to subject defendants to criminal and civil liability for insider trading. 

In United States v. Blaszczak, the court faced the question of whether these limitations applied when prosecutors charged the wire fraud and other statutes to prove insider trading. The court sided with the government and affirmed the convictions of two former analysts at a major hedge fund, a political intelligence consultant, and a former government employee for wire fraud and conversion of U.S. property and also affirmed the jury’s verdict that the defendants (except the former government employee) were guilty of Title 18 securities fraud and conspiracy. In doing so, the court found that (1) confidential government information can constitute property under the wire fraud and Title 18 securities fraud statutes, and (2) the personal benefit test traditionally required in Section 10(b) cases does not apply to cases premised on wire fraud and Title 18 securities fraud.

This opinion thus permits prosecutors to prove insider trading without proving the tipper received a personal benefit in exchange for the inside information, or by extension that a remote tippee was aware that the tipper received a personal benefit in exchange for the inside information. This could have the effect of subjecting defendants to possible criminal liability even in situations in which the government is unable to meet the elements of Section 10(b) and the SEC is unable to bring a civil case.