Date01 January 2021
AuthorGruener, Emily

INTRODUCTION 180 I. THE DEVELOPMENT OF INSIDER TRADING LAW 183 A. Rejection of the "Information Parity" Rationale for Insider Trading Liability 184 B. The Classical and Misappropriation Theories of Insider Trading 185 C. The Addition of 18 U.S.C. Section 1348 as a Vehicle for Insider Trading Liability 189 II. THE BLASZCZAK COURT ' S DECISION TO DISTINGUISH THE TITLE 18 SECURITIES FRAUD STATUTE FROM THE TITLE 15 SECURITIES FRAUD STATUTE BASED ON LEGISLATIVE HISTORY 189 III. THE BLASZCZAK COURT'S ENDORSEMENT OF A UNIFIED "EMBEZZLEMENT" THEORY OF INSIDER TRADING 194 A. The Blaszczak Court's Move to Unite Title 15 and Title 18 Securities Fraud Under a Common Theory of "Embezzlement" 195 B. The Blaszczak Court's Holding that the Personal Benefit Test Has No Application Under the "Embezzlement" Theory of Fraud 196 IV. THE EMBEZZLEMENT THEORY'S REMAINING DOCTRINAL AND PRACTICAL PROBLEMS 200 A. The Tension Between the Policy Considerations Animating Dirks and the Embezzlement Theory of Liability 200 B. Inconsistencies Between the Text of the Title 15 Securities Laws and the Embezzlement Theory 203 C. The Embezzlement Theory Is Too Narrow to Capture All Types of Harmful Insider Trading 204 V. A NEW APPROACH TO PROSECUTING INSIDER TRADING 206 CONCLUSION 210 INTRODUCTION

Before he was convicted for insider trading, David Blaszczak was one of the most effective healthcare political intelligence consultants in Washington. (1) The secret to Blaszczak's success was his network. He unearthed information about upcoming changes to government-provided insurance coverage and reimbursement rates information from Christopher Worrall, (2) a Center for Medicare and Medicaid Services ("CMS") employee who had his "hands in everything." (3) Using Worrall's information, Blaszczak developed a reputation for making spot-on "predictions" about how proposed CMS rules would affect publicly traded healthcare companies, allowing the investment firms he tipped off to make lucrative trades before CMS announced the changes to the public. (4) Blaszczak once bragged to a colleague: "I am a beast that cannot be stopped." (5)

Theodore Huber, Robert olan, and Jordan Fogel were three of Blaszczak's clients, partners and analysts at Deerfield Management Company, L.P., an investment firm that managed multiple hedge funds specializing in healthcare. (6) The Three Deerfield partners trusted Blaszczak because they knew he "enjoyed unique access to the agency's pre-decisional information through his inside sources at the agency." (7) Fogel called his partnership with Blaszczak the "Blaszczak-Fogel money printing machine." (8)

In June 2010, CMS began discussing new cuts to radiation oncology reimbursement rates. Blaszczak met with Worrall at CMS on May 8, 2012. (9) The next day, Blaszczak emailed Fogel that he had an update on one of Fogel's "favorite topics"; he relayed information that there would be cuts to radiation oncology reimbursement rates that would financially harm certain healthcare providers. (10) Huber, olan, and Fogel used this information to trade in the securities of three companies, Varian Medical Systems, Elekta AB, and Accuray Incorporated, shorting approximately $80 million of their shares and making approximately $2.73 million in profits after CMS announced the rate cuts to the public. (11)

The trading team repeated this pattern in 2013. Blaszczak met with Worrall on June 14, 2013. in the days following, Blaszczak told Fogel that CMS would issue a proposed rule that would cut reimbursement rates for various kidney dialysis treatments by 12 percent. (12) Deerfield then entered orders to short stock in Fresenius Medical Care, since Fresenius would be "hurt by such a significant ESRD reimbursement reduction." (13) After the proposed rule was announced on July 1, 2013, Deerfield made approximately $860,000 in trading profits. (14) Blaszczak then continued to provide non-public CMS information to Fogel about internal deliberations regarding the final rule, tipping Fogel that the 12 percent cut announced in the proposed rule would actually be phased in over three or four years. (15) Based on this information, Deerfield executed trades in Fresenius and Davita Healthcare Partners before the final rule was announced, earning about $791,000 in profits. (16) Fogel praised Blaszczak for his "predictions," calling him "the man." (17) From 2009 to 2014, this scheme allowed Deerfield to trade on insider information for a profit of about $7.1 million dollars. (18)

The United States filed an indictment against Blaszczak, Huber, Olan, and Worrall (19) on March 5, 2018 for eighteen counts, including securities fraud under two different statutes: 18 U.S.C. section 1348 ("Title 18 securities fraud") and 15 U.S.C. section 78j(b) ("Title 15 securities fraud"). (20) Both Title 15 and Title 18 prohibit using schemes to defraud in connection with the sale or purchase of securities. (21) But Title 15, enacted in 1934, has been around much longer than Title 18, enacted in 2002. (22) As a result, most prosecutors bring insider trading charges under Title 15, and relatively few courts have interpreted Title 18 independently of Title 15. (23) In Blaszczak, however, the government brought charges under both statutes. And after a five-week trial, Huber, olan, Worrall, and Blaszczak were acquitted of Title 15 securities fraud, but Huber, Olan, and Blaszczak were convicted--for the same conduct--of Title 18 securities fraud. (24)

The district court had given two different jury instructions. Under Title 15, the court required the jury to find that Worrall had tipped the information in exchange for a personal benefit and that Blaszczak, Huber, and olan knew that he tipped the information in exchange for a personal benefit. (25) The "personal benefit" instruction stemmed from well-settled Supreme Court precedent under Dirks v. s.E.c. holding that trading on inside information is not fraudulent under Title 15 unless the tipper disclosed the information for a personal benefit. (26) But declining to impose the Dirks personal benefit requirement to convictions brought under Title 18, the district court instructed that jury it could convict under Title 18 if the defendant knowingly and willingly "participated in a scheme to embezzle or convert confidential information from CMS by wrongfully taking that information and transferring it to his own use or the use of someone else." (27)

On appeal, the defendants argued that the Second Circuit should reverse their Title 18 securities fraud convictions because the district court failed to instruct the jury of the government's duty under Dirks to prove that Worrall had breached his duty to CMS in exchange for a personal benefit and that Huber, olan, and Blaszczak knew of this breach. (28) Instead, the Second Circuit upheld their convictions, becoming the first federal court of appeals to hold that insider trading convictions brought under the Title 18 securities fraud statute do not require the government to prove the Dirks personal benefit requirement. (29)

This Note explores the impact of United States v. Blaszczak on the prosecution of insider trading. Part I describes the development of insider trading law, including the genesis of the Dirks "personal benefit" requirement applied in Title 15 securities fraud cases. Part II examines the Second Circuit's rationale in Blaszczak for distinguishing Title 18 securities fraud from Title 15 securities fraud based on legislative history and demonstrates that weight of legislative history and judicial precedent supports Second Circuit's decision. Part III argues that the Blaszczak decision represents the Second Circuit's endorsement of a unified "embezzlement" theory of insider trading, under which the Dirks personal benefit test becomes largely irrelevant. Part IV explores the doctrinal inconsistencies and policy problems inherent in such an approach. Part V suggests that prosecutors could use the Blaszczak court's holding that the meaning of "fraud" differs across the Title 15 and Title 18 securities fraud statutes to advance a new approach to prosecuting insider trading altogether--an approach that requires neither proof of a personal benefit nor breach of a fiduciary duty.


    The federal securities laws do not expressly define or prohibit insider trading. (30) Instead, liability for insider trading developed from the antifraud provisions of the Securities Exchange Act of 1934 (the "Exchange Act"). (31) Section 10(b) of the Exchange Act prohibits

    us[ing] or employ[ing], in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered...any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. (32) Rule 10b-5, promulgated under the SEC's Section 10(b) authority, prohibits using any "device, scheme, or artifice to defraud...in connection with the purchase or sale of any security." (33)

    1. Rejection of the "Information Parity" Rationale for Insider Trading Liability

      The SEC initially championed a theory of insider trading liability under the Title 15 securities laws based on the "inherent unfairness involved where a party takes advantage" of insider information "knowing it is unavailable to those with whom he is dealing." (34) This approach to insider trading provided a bright-line rule, prohibiting any person in possession of material, non-public information from trading before the information was disclosed to the public. In S.E.C. v. Texas Gulf Sulphur Co., the Second Circuit accepted the SEC's "information parity" rationale, finding that Rule 10b-5 "is based in policy on the justifiable expectation of the securities marketplace that all investors trading on impersonal exchanges have relatively equal access to...

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