(Bloomberg) -- A federal appeals court upheld the insider-trading conviction of David Blaszczak, the one-time “King of Political Intelligence” who got a year in prison for profiting from government secrets in a ruling that may make it easier for prosecutors to win insider-trading cases in the future.
Blaszczak, a Washington consultant and former Medicare official, was convicted in 2018 of giving two hedge funds advance word on changes to government reimbursement rates. A federal jury found that he provided the clients with tips he picked up from ex-colleagues who were still in government.
Convicted with Blaszczak were his friend and source inside the government, Christopher Worrall, and two partners at Deerfield Management, Robert Olan and Theodore Huber, who traded on the tips. Worrall was sentenced to 20 months, and Olan and Huber each got three years and were ordered to pay more than $1.3 million. Their convictions were upheld as well.
The trial provided a look into the capital’s political intelligence business, in which former government officials leverage relationships with ex-colleagues to try to give investor clients insights into potentially market-moving regulatory actions.
“A government agency’s confidential information relating to its contemplated rules may constitute ‘property’” for purposes of federal wire fraud and securities fraud laws, Circuit Judge Richard Sullivan wrote on behalf of the majority of the three-judge panel.
The appeals court ruling may also make it easier for prosecutors to win future insider-trading convictions.
At the end of Blaszczak’s trial, the judge told jurors that to convict on some of the securities fraud charges, they needed to find that the government source passed information in violation of a duty to keep it secret, and in exchange for a “personal benefit” such as cash. They also had to conclude that the people who traded on the information knew about the benefit to the tipper. The jury acquitted the defendants of all of those charges.
The personal benefit requirement was the subject of a key 2014 decision from the appeals court that overturned the guilty verdict of Todd Newman, formerly of Diamondback Capital Management. That decision made it harder for prosecutors to prove insider trading and resulted in more than a dozen prosecutions falling apart.
In Monday’s ruling, the New York appeals court found that the personal benefit requirement didn’t apply to wire fraud charges and to some of the securities fraud charges that the defendants were convicted of. In his opinion, Sullivan rejected the defendants’ argument that the court should extend the personal-benefit rule to prevent prosecutors from simply bringing charges under the more lenient statute.
Judge Amalya Kearse dissented from the ruling, saying the confidential information Blaszczak obtained from the federal Centers for Medicare and Medicaid Services wasn’t “a thing of value” to the agency, as required under the law.
“CMS is not a business; it does not sell, or offer for sale, a service or a product; it is a regulatory agency,” Kearse wrote.
After a monthlong trial in Manhattan, Blaszczak was found guilty of passing details of government plans to cut reimbursement rates for a certain kind of cancer treatment and for kidney dialysis. Deerfield, which paid Blaszczak about $1 million in fees, used the information to make more than $3.5 million in trading profits, according to prosecutors.
Blaszczak was found guilty of 10 of the 18 counts against him. The jury convicted Deerfield partners Olan and Huber of five counts and acquitted them of five others. Worrall was found not guilty of 14 counts. He was convicted of one count of theft of government property and one count of wire fraud.
Deerfield agreed in 2017 to pay $4.6 million to settle U.S. Securities and Exchange Commission claims that it failed to properly supervise its employees. It didn’t admit or deny the allegations.
The case is U.S. V. Blaszczak, 18-2825, U.S. Court of Appeals for the Second Circuit (Manhattan).
(Updates with explanation on personal benefit)
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