Second Circuit Narrows Reach of Wire Fraud and Insider Trading Prohibitions

This decision will limit the government's ability to bring fraud or insider trading prosecutions where the information used to achieve an advantage is regulatory information held by the government. Also, the Second Circuit is now in greater alignment with the Supreme Court's wire fraud jurisprudence in Kelly and other recent cases. Finally, a concurring opinion raises important questions about the current landscape for insider trading prosecutions and demonstrates why only Congress can resolve these issues by finally passing an insider trading statute.

Background

The conduct at issue in this case involved trading in securities based on information about proposed regulations issued by the Centers for Medicare & Medicaid Services (CMS). CMS sets the rate at which Medicare and Medicaid will reimburse health care providers. Blaszczak, a hedge fund consultant and former employee of CMS, maintained ties to current CMS employees (including a co-defendant), and thus enjoyed advance access to information regarding CMS's upcoming regulatory actions. In essence, the scheme involved Blaszczak learning nonpublic information regarding CMS's planned reimbursement changes from his CMS contacts; the trading on that information by members of the conspiracy; and reaping the profit.