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US Department of Justice admits error in insider trading convictions

United States Publication April 2021

On April 2, 2021, the US Department of Justice (DOJ) conceded that the insider trading convictions of Christopher Worrall, an ex-employee for the Centers for Medicare and Medicaid Services (CMS), David Blaszczak, a political intelligence consultant, and Theodore Huber and Robert Olan, hedge fund analysts (collectively, the "CMS Defendants"), should no longer stand in light of the Supreme Court's decision in the so-called "Bridgegate" matter.

A jury convicted the CMS Defendants of conversion of government property (18 U.S.C. § 641) and wire fraud (18 U.S.C. § 1343) for an alleged insider trading scheme in which Worrall provided Blaszczak with confidential information about upcoming changes to CMS reimbursement rates.1 Blaszczak then provided that information to Huber and Olan, who used the information to make profitable trades for their hedge fund. On December 30, 2019, the Second Circuit upheld these convictions, finding that the confidential CMS information was "property" and a "thing of value" under the conversion and wire fraud statutes. The Second Circuit also upheld Blaszczak's, Huber's and Olan's convictions on additional charges not brought against Worrall, including conspiracy to defraud the United States (18 U.S.C. § 371). Review our prior coverage of the Second Circuit decision.

Subsequently, on May 7, 2020, the Supreme Court decided Kelly v. United States, 140 S. Ct. 1565 (2020), which limited the applicability of certain federal fraud statutes. In Kelly, associates of former New Jersey Governor Chris Christie were charged with wire fraud (18 U.S.C. § 1343) and fraud of a federal program (18 U.S.C. § 666(a)(1)(A)) for allegedly engaging in a political retribution scheme against a local mayor by commissioning a false traffic study that created extreme traffic delays in the mayor's town by closing multiple lanes on the George Washington Bridge from New Jersey into Manhattan (Bridgegate). After their convictions, the Kelly defendants appealed to the Supreme Court. The Supreme Court reasoned that the federal fraud statutes at issue required that the object of the scheme must be to obtain money or property. 140 S. Ct. at 1573. However, the Kelly defendants sought only to close lanes on the bridge, which the Court called "a quintessential exercise of regulatory power." Id. at 1572. The Court further held that to the extent the lane-closure scheme involved usurping government employees' time and labor from the government, that usurpation was an incidental byproduct of the scheme and not its object. Id. at 1573-74. Therefore, the Court reversed the convictions.

In light of Kelly, Blaszczak, Huber, and Olan submitted a petition for a writ of certiorari to the Supreme Court.2 They argued that, like the lane closures in Bridgegate, the information about CMS reimbursement rates was not "property" or a "thing of value" under the relevant statutes. The DOJ also requested that the Supreme Court grant the petition, vacate the decision and remand the case for further consideration in light of Kelly. The Supreme Court granted the parties' requests on January 11, 2021.

In its brief filed on April 2, 2021, the DOJ acknowledged that while CMS had an economic interest in the information at issue, that economic interest was not the object of the scheme. The DOJ therefore conceded that for purposes of the wire fraud and conversion of government property statutes, the confidential CMS information did not constitute "property" or a "thing of value," meaning that the CMS Defendants' convictions under those statutes cannot be sustained. In an emergency motion filed on April 5, 2021, Worrall's counsel indicated that the DOJ did not oppose Worrall's request to reverse his conviction and vacate his sentence.

The DOJ is still advocating that Blaszczak's, Huber's and Olan's convictions on conspiracy to defraud the United States (18 U.S.C. § 371) be affirmed on the theory that the relevant portion of that statute not only reaches schemes that deprive the government of money or property but also "any conspiracy for the purpose of impairing, obstructing or defeating the lawful function of any department of Government." Id. at 10. Unlike the wire fraud and conversion charges, the only charges for which Worrall was convicted, conspiracy to defraud the United States requires only an incidental intent to defraud the United States to sustain the charge.


Footnotes

1   The jury acquitted the defendants of their charges under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, which is the typical avenue used for prosecuting insider trading cases. The issues discussed here do not apply to those laws.

2   Worrall did not submit a petition for a writ of certiorari, but filed a memorandum in support of the petitions.



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