In the Wake of Bridgegate: The Government Abandons Convictions in United States v. Blaszczak

By Ilana Haramati & Priya Pasricha

The Supreme Court’s 2020 Bridgegate decision, United States v. Kelly, 140 S. Ct. 1565, 1574 (2020), which circumscribed the reach of the federal mail and wire fraud statutes,18 U.S.C. §§ 1341, 1343, continues to have a broad impact on the viability of many white collar prosecutions.  Just last month, in light of Kelly, the government abandoned its longstanding position that the defendants in United States v. Blaszczak, et. al, No. 17-cr-357 (S.D.N.Y.), No. 18-2811 (2d Cir.) , had violated those and similar statutes based on the misappropriation of government confidential information.  Instead, the prosecutors in Blaszczak recently backtracked, asking the Second Circuit to reverse the defendants’ 2018 convictions for wire fraud, insider trading and conversion.

The defendants in Blaszczak, were convicted of insider trading based on non-public information regarding a proposed government regulation that an “insider” at the Centers for Medicare and Medicaid Services (“CMS”) “tipped” to his friend.”  Several of the Blaszczak counts of convictions relied on a somewhat innovative prosecutorial theory that by trading on CMS’s confidential information, the defendants had defrauded CMS of property in violation of the federal wire fraud statute (18 U.S.C. § 1343), the Title 18 insider trading statute (18 U.S.C. § 1348), and the federal conversion statute (18 U.S.C. § 641).  In other words, the prosecutors considered mere information as “property.”  In 2018, at the time of the Blaszczak trial, this theory was novel: it was a substantial departure from traditional insider trading prosecutions that required an insider to breach a fiduciary duty by “tipping” material non-public information to be traded upon in exchange for a personal benefit.

Following the Supreme Court’s Bridgegate opinion, though, the government’s original position in Blaszczak seemed to be untenable.  In Kelly, the Supreme Court held that a “scheme to reallocate the [George Washington] Bridge’s access lanes” was an “exercise of regulatory power” rather than “the taking of property,” and thus could not constitute fraud under 18 U.S.C. § 1343 and other similar federal statutes.  Kelly, 140 S. Ct. at 1572-74.  The Second Circuit had previously upheld the convictions, finding that CMS’s confidential information could constitute “property.” United States v. Blaszczak, et. al, 947 F.3d 19 (2d Cir. 2019).  But following Kelly, the Supreme Court vacated the Blaszczak convictions and remanded to the Second Circuit for further consideration.

On remand, the case has taken further unexpected turns.  The government has now “confess[ed] error” in its prior positions, and asked the Second Circuit to reverse the convictions.  United States v. Blaszczak, et. al, No. 18-2811, ECF Doc. 453, Gov. Br. on Remand at 8 (2d Cir. Apr. 2, 2021).  Specifically, the government now recognizes that CMS’s information—that a new regulation would be proposed—was not “property” or a “thing of value,” and its misappropriation could not support the wire fraud (§ 1343), insider trading (§ 1348) and conversion (§ 641) convictions in Blaszczak.  After three years of arguing to the contrary, the government maintains that “[i]n light of the Supreme Court’s holding in Kelly, it is now the position of the Department of Justice that in a case involving confidential government information, that information typically must have economic value in the hands of the relevant government entity to constitute ‘property’ for purposes of 18 U.S.C. §§ 1343 and 1348” or “a ‘thing of value’ under 18 U.S.C. § 641.”  Id. at 7-8.  The government thus acknowledged “that the confidential information at issue in [Blaszczak] does not constitute ‘property’ or a ‘thing of value’ under the relevant statutes after Kelly,” requiring the convictions’ reversal.  Id. at 8.

Both parties now agree that the confidential information in Blaszczak was not “property.”  Still, the Second Circuit is apparently not convinced.  On April 16, 2021, the Court announced that it would appoint amicus curiae to argue the government’s original position that Kelly “does not invalidate the original panel’s holding that the confidential government information at issue here constituted ‘property.’”  United States v. Blaszczak, et. al, No. 18-2811, ECF Doc. 470, Order (2d Cir. Apr. 16, 2021).  The amicus brief is due May 21, 2021, and oral argument is set for June 9, 2021.  For at least a little longer, the limits of “property” for purposes of Title 18 federal insider trading prosecutions, remain uncertain in the Second Circuit.