NEW YORK (AP) — A divided appeals court on Tuesday rejected the insider trading convictions of four men, including an ex-government employee turned consultant, prompting a sharp dissent from a judge who says the ruling may prompt insiders to sell confidential government information to the highest bidders.
The decision of the 2nd U.S. Circuit Court of Appeals came in a case in which a Washington consultant, David Blaszczak, was charged with converting government secrets into hedge fund profits.
In 2018, a jury convicted Blaszczak and three hedge fund employees in a scheme prosecutors said enabled the hedge fund workers to make over $3.5 million illegally for their company from 2012 through 2014. The Securities and Exchange Commission said the profits reached $3.9 million.
Before becoming a consultant, Blaszczak worked at the Centers for Medicare & Medicaid Services, part of the U.S. Department of Health and Human Services.
The SEC and prosecutors said he boasted about access to government information about the timing and content of planned changes to reimbursement rules affecting publicly traded health care-related companies.
In a 2-to-1 decision Tuesday, the 2nd Circuit said it was reversing its prior affirmance of the convictions after the U.S. Supreme Court urged further consideration to consider its reversal of convictions of officials in the administration of former New Jersey Gov. Chris Christie.
In that case, the Supreme Court concluded that politically motivated conduct by the officials to cause significant traffic gridlock for several days at the New Jersey entrance to the George Washington Bridge linking New Jersey and Manhattan was not a crime because they did not aim to deprive the bridge’s owners of money or property.
In the Blaszczak case, defense lawyers argued that their client’s information did not constitute property or a thing of value within the meaning of criminal laws pertaining to fraud and insider trading. Their argument, as it related to most counts, was supported by prosecutors in the most recent appeal.
The 2nd Circuit agreed to reverse the majority of convictions and vacated convictions on two other counts, leaving it to a lower court to decide whether a retrial on those counts will occur.
In a dissent, Circuit Judge Richard A. Sullivan blasted the ruling. He wrote that it “effectively permits sophisticated insiders to leverage their access to confidential government information and sell it to the highest bidders — in this case, hedge funds that used the confidential information to make millions shorting the stocks of public companies affected by CMS’s regulations.”
He said the ruling also “threatens to upend decades of settled precedent concerning frauds premised on the theft of intangible property and suggests — in what amounts to dicta — a curious and troubling rule of deference that would require federal courts to acquiesce whenever the government announces a new, post-conviction statutory interpretation.”
Sullivan said he disagreed with the majority’s conclusion that confidential information held by a government agency is not property.
David Patton, a lawyer who defended Blaszczak, declined comment.
A prosecutor’s spokesperson also declined comment.