Second Circuit Holds That A 'Personal Benefit' Is Not Required For Insider Trading Under Criminal Securities Statute

The Second Circuit held earlier this week that the criminal statute proscribing securities fraud permits convictions for insider trading without proof that the provider of material, nonpublic information received a personal benefit in exchange for that information, even though proof of a personal benefit would be required under the general securities-law statute prohibiting insider trading. The decision in United States v. Blaszczak could ease prosecutors' burden in obtaining convictions for insider trading by enabling the government to avoid the potentially complicated "personal benefit" issue, which has generated much litigation in recent years. The ruling would not affect civil cases, to which the criminal statute does not apply. The court also held that a government agency's confidential information can constitute "property" or a "thing of value" for purposes of prosecutions under the criminal securities-fraud, wire-fraud, and conversion statutes.

Background

Insider-trading cases, whether civil or criminal, have traditionally been brought under the general securities-law statute prohibiting securities fraud, 15 U.S.C. § 10(b) ("Title 15"). The Supreme Court held many years ago that an insider cannot be convicted of Title 15 securities fraud unless the government proves that he or she breached a duty of trust or confidence by using or disclosing material, nonpublic information ("MNPI") in exchange for a "personal benefit." Dirks v. SEC. Similarly, courts have generally agreed that a tippee cannot be convicted of securities fraud unless he or she used or conveyed the MNPI knowing that it had been obtained in breach of the insider's duty (a standard that includes the tippee's knowledge of the tipper's receipt of a personal benefit).

In 2014, the Second Circuit sought to tighten the personal-benefit requirement. That decision triggered a round of reactions by the Ninth Circuit, the Supreme Court, and, eventually, the Second Circuit itself, which largely retreated from its own 2014 decision.

In the meantime, some prosecutors appear to have decided to try to avoid the doctrinal confusion involving Title 15 securities fraud by prosecuting insider trading under a specific criminal statute - 18 U.S.C. § 1348 - instead of (or in addition to) under Title 15's general anti-fraud provision. Prosecutors have argued that, whatever the personal-benefit test might be under Title 15, it does not apply under Title 18.

Section 1348 imposes criminal...

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