On December 27, 2022, the Second Circuit called into question the government’s theory of insider trading of confidential government agency information, potentially undercutting the DOJ’s enforcement of various white-collar crimes.

The panel tossed the convictions of four individuals found guilty of securities fraud, wire fraud, and theft of government property for their coordination to trade stocks based on leaked impending Medicare reimbursement rate changes. Their convictions relied on the theory that they traded based on material nonpublic information obtained from a government agency, which two of the defendants used to earn millions at their hedge funds by shorting stocks of affected companies.

The Divided Majority’s Rulings

In its ruling, the Second Circuit held that the pre-decisional, confidential regulatory information obtained from CMS didn’t qualify as “property” or a “thing of value” under wire and securities fraud statutes. The court determined that the information was not the “property” of CMS because “CMS is not a commercial entity; it does not sell, or offer for sale, a service or a product.” The alleged disclosure of CMS’s confidential information had “no direct impact on the government’s fisc.” The court thus concluded, “The information reflecting such a decision and the timing of that disclosure are regulatory in character and do not constitute money or property of the victim; and they are not a ‘thing of value’ to CMS that is susceptible to be converted.”

The Concurrence

In his concurring opinion, Judge John M. Walker, Jr., joined by Judge Amalya L. Kearse, questioned the fairness of the “asymmetry” in the requirements for insider trading under Title 18 securities fraud as compared to the Securities Exchange Act of 1934. He expressed concern about the government’s use of Title 18 securities fraud statutes to prosecute insider trading offenses without proof of a “personal benefit” to the person supplying the insider information, which would be required under the Exchange Act. The impact of this “glaring anomaly” is that the government has fewer elements to prove for a criminal conviction than to impose civil penalties for the same conduct.

The Impact

The highly anticipated ruling curtails the government’s ability to bring securities fraud cases based on information obtained from government agencies, directly implicating the DOJ’s increased reliance on Title 18 to pursue insider trading cases. The opinion could also provide new strategies for defending those investigated under Title 18. Further, the court’s definition of property may also narrow the scope of criminal cases that involve the alleged theft or fraudulent use of government property. Insider trading cases involving information of public companies are likely unaffected because the court’s decision distinguished between the confidential information of government agencies and that of commercial entities.