By Gregory A. Brower and Thomas J. Krysa

Gregory A. Brower is a Shareholder with Brownstein Hyatt Farber Schreck, LLP in Las Vegas, NV and Washington, DC. Mr. Brower also serves on WLF Legal Policy Advisory Board and is the WLF Legal Pulse’s Featured Expert Contributor, White Collar Crime and Corporate Compliance.  Thomas J. Krysa is a Shareholder with the firm in its Denver, CO office.

In a recent Second Circuit decision, a divided three-judge panel drew a stark distinction between two federal securities fraud statutes likely providing a blueprint for future criminal prosecutions for insider trading.  In United States v. Blaszczak, a Second Circuit panel held that the Dirks “personal benefit” test, which applies to certain civil and criminal insider trading charges, did not apply to criminal insider trading charges brought under Title 18 of the federal criminal code. 1  This decision could have significant implications for future insider trading prosecutions.

The Tipping Scheme

In Blaszczak, the government charged several individuals with securities fraud for a tipping scheme involving confidential information from the Centers for Medicare and Medicaid Services (CMS).  Blaszczak, a former CMS employee, was employed as a paid “political-intelligence” consultant for various hedge funds.  He used former CMS colleagues as inside sources at the agency to obtain key information involving future agency rule changes that would move the stock market when publicly disclosed.  He tipped this material, nonpublic information to his hedge fund contacts who traded on the information reaping millions in profits.  Although Blaszczak received consulting fees from the hedge funds for his services, his friend and inside source at CMS (the lone-charged CMS tipper) did not receive any monetary benefit for his tips.  The government alleged that the CMS source received a benefit in exchange for the tips by virtue of his close friendship with Blaszczak who provided him with private sector employment advice and professional introductions. 

The Federal Securities Fraud Statutes

The government charged the tipping scheme under both Section 10(b) of the Securities Exchange Act of 1934 (Title 15) and Section 1348 of Title 18 of the federal criminal code.2  Section 10(b) and its related Rule 10b-5 are the traditional securities fraud provisions that are charged by both the SEC and DOJ in civil and criminal cases, respectively.  In the insider trading context, Section 10(b) and Rule 10b-5 have been analyzed extensively at the circuit court and Supreme Court levels.  Section 1348, a criminal statute enacted in 2002 and charged solely by the DOJ, has received much less attention.  Section 1348 was patterned after the federal mail and wire fraud statutes.  Generally speaking, when charging Section 1348 securities fraud the government must prove that an individual knowingly and willfully participated in a fraudulent scheme to defraud a person in connection with a securities transaction.

Section 10(b) and Rule 10b-5 tipping cases have their own unique judicially-created requirements.  In Dirks, the Supreme Court held that in order to prove tipping liability under Section 10(b) and Rule 10b-5 the government must prove that the insider breached a duty of trust and confidence by tipping material, nonpublic information to others in exchange for a “personal benefit.” 3  During the last six years, the definition of a personal benefit has been vigorously litigated in the courts. 4  The results have varied.  Currently, a personal benefit is broadly defined for the most part and can range from a clear monetary benefit such as kickback, to a mere quid pro quo between friends or relatives.  Under Dirks, a tippee, or recipient of inside information, is not liable under Section 10(b)/Rule 10b-5 unless the government proves he or she traded on, or tipped the inside information, while knowing that the original tipper received a personal benefit in exchange for the information. 

The Jury Instructions                    

In Blaszczak, the trial judge gave differing instructions to the jury with respect to the Section 10(b)/Rule 10b-5 and Section 1348 securities fraud charges.  For the Section 10(b)/Rule 10b-5 charges, the trial judge instructed the jury that the government had to prove the Dirks personal benefit test; that is that the CMS tipper received a personal benefit in exchange for providing the material, nonpublic information to Blaszczak and that the downstream tippees knew this.  Conversely, for the Section 1348 charges, the trial judge declined the defendants’ request to provide a Dirks-like instruction, and instead instructed the jury that the government must prove the defendants “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.”    

After four days of deliberations, the jury returned a split verdict on the securities fraud charges.  Of note, the jury acquitted all defendants on the Section 10(b)/Rule 10b-5 charges while at the same time convicting all but one defendant (the CMS tipper) on the Section 1348 charges.  One can infer from this result that the government likely failed to prove the Dirks personal benefit test for the Section 10(b)/Rule 10b-5 charges.

The Second Circuit Decision            

On appeal, the defendants argued that the trial judge erred by not including a Dirks-like instruction to the jury for the Section 1348 charges.  The defendants argued that the term “defraud” should be construed consistently and have the same meaning in insider trading cases across the securities fraud statutes whether charged under Title 15 or Title 18.  The Second Circuit panel disagreed.  The panel noted that the personal benefit test was a judge-made doctrine that arose from the Exchange Act’s statutory purpose (i.e., to eliminate the use of inside information for personal advantage).  The panel drew a distinction between this statutory purpose and Section 1348 which it said was rooted in the embezzlement or misappropriation theory of fraud, where the Dirks test could find no footing.  The panel further noted that Congress enacted Section 1348 as part of the Sarbanes-Oxley Act of 2002 in large part to overcome the technical impediments of the existing Title 15 securities-fraud regime, and to provide a broader enforcement mechanism for federal prosecutors to pursue securities fraud claims.

Future Implications             

Certainly this decision will provide a blueprint for future criminal insider trading prosecutions by the DOJ under Section 1348, perhaps even in cases that are not prosecuted by the SEC due to questionable evidence supporting the Dirks personal benefit test.  However, in this potentially narrow band of cases, the DOJ still would be required to prove beyond a reasonable doubt that the defendants knowingly and willfully participated in a scheme to defraud, which always requires significant, probative evidence.  That being said, an anomalous outcome could be possible where the SEC loses a civil case that the DOJ wins criminally on the same facts.   

In addition, going forward, the Dirks personal benefit test will continue to come under scrutiny by the courts and advocates alike.  In the absence of a clear monetary benefit, the test is difficult to apply in practice particularly in a jury trial setting, and it will continue to create issues on appeal.

Finally, the Blaszczak decision could amplify the call for insider trading legislation to bring some clarity and harmony to the federal securities fraud statutes.  Until that time comes, however, the government and charged defendants will continue the ongoing tug-of-war over the boundaries of the current insider trading laws.    


  1. United States v. Blaszczak, No.18-2825 (2d Cir. Dec. 30, 2019).
  2. The government charged other criminal statutes but this note focuses solely on the securities fraud charges.
  3. SEC v. Dirks, 463 U.S. 646 (1983).
  4. See, e.g., United States v. Newman, 773 F.3d 438 (2d Cir. 2014); Salman v. United States, 137 S. Ct. 420 (2016); United States v. Martoma, 894 F.3d 64 (2d Cir. 2017).