The U.S. Court of Appeals for the Second Circuit has ruled that confidential information from a government agency can be considered property for purposes of prosecuting securities and wire fraud, and that the defendants didn't have to glean a personal benefit to be convicted under that statute.

One of those defendants was represented before the appellate court by former U.S. Solicitor General Donald Verrilli Jr., who's now with Munger, Tolles & Olson in Washington, D.C.

The Second Circuit panel, in the decision issued Monday, upheld on a 2-1 vote the convictions of a former federal employee, a hedge fund consultant, and employees of a hedge fund who were accused of using confidential government information to boost revenues.

Verilli represented one of the two hedge fund employees, who were accused of procuring information from the hedge fund consultant, who in turn had obtained it from sources within the federal government, including the worker convicted in the case.

According to prosecutors, the scheme started with that worker, Christopher Worrall. He was accused of leaking confidential government information on at least one occasion to David Blaszczak, a consultant for hedge funds. Worrall was an employee of the U.S. Centers for Medicare and Medicaid Services.

Blaszczak would then give that information to Robert Olan, Verilli's client, and Theodore Huber, both of which were employees of health care-focused hedge fund Deerfield Management Co.

With that information, Olan and Huber would trade assets as they saw fit. On one occasion, for example, they were told by Blaszczak that CMS would be changing its reimbursement rate for radiation oncology.

Deerfield then used that information to trade assets and secured $2.73 million ahead of the reimbursement rate change. They did the same on a number of other occasions, ultimately earning millions of dollars from the trades.

Each defendant was convicted on various charges in federal court after prosecutors handed down an 18-count superseding indictment in 2018. They were charged by the U.S. Attorney's Office for the Southern District of New York.

On appeal, the defendants challenged several aspects of their conviction. All were rejected, but the Second Circuit highlighted two matters of law raised by the defendants.

The first questioned whether they could be convicted on wire fraud and Title 18 securities fraud for exchanging confidential government information. They argued that the information shouldn't be considered "property," as is required for a conviction under the statute.

The Second Circuit, in its decision this week, disagreed. It said that to constitute "property," something has to have value. There was no question the information had value, the court said.

"We afford the same meaning to the word 'property' in both the wire fraud and Title 18 securities fraud statutes," the court wrote. "Under each of these fraud statutes, the word 'property' is construed in accordance with its ordinary meaning: 'something of value' in the possession of the property holder."

Prosecutors had presented evidence at trial to support that point, according to the decision. They had shown that, while the information isn't tangible, the agency has a significant economic interest in keeping it confidential before it's made public, the decision said.

"For example, the evidence at trial established that CMS invests time and resources into generating and maintaining the confidentiality of its nonpublic predecisional information—resources that are devalued when the information is leaked to members of the public," the court wrote.

Judge Amalya Kearse of the U.S. Court of Appeals for the Second Circuit disagreed with the majority's interpretation of confidential government information as property in a dissenting opinion.

"CMS does not seek buyers or subscribers; it is not in a competition; it is an agency of the government that regulates the conduct of others," Kearse wrote. "It does so whether or not any information on which its regulation is premised is confidential."

The Second Circuit also ruled in the decision that prosecutors did not need to show the defendants obtained a "personal benefit" to convict them on charges of Title 18 securities fraud.

Such a standard applies only to charges of Title 15 securities fraud, the appellate court wrote. That was established in Dirks v. SEC, which was decided by the U.S. Supreme Court in 1983.

At trial, the jury had acquitted all defendants on the Title 15 securities fraud charges, so if the Second Circuit had decided to expand the personal benefit standard to Title 18 securities fraud, there was a chance those convictions may have been thrown out.

The Second Circuit said the intention of Congress when enacting Title 18 securities fraud did not merit interpreting a similar personal benefit standard.

"Given that Section 1348 [of Title 18] was intended to provide prosecutors with a different—and broader—enforcement mechanism to address securities fraud than what had been previously provided in the Title 15 fraud provisions, we decline to graft the Dirks personal-benefit test onto the elements of Title 18 securities fraud," the court wrote.

Huber was represented by Alexandra A.E. Shapiro from Shapiro Arato Bach; Blaszczak was represented by Colleen Cassidy from Federal Defenders of New York; and Worrall was represented by Daniel Sullivan from Holwell Shuster & Goldberg. None were immediately available for comment Tuesday.

The U.S. Attorney's Office for the Southern District of New York could not immediately be reached for comment Tuesday.

Judge Richard Sullivan of the U.S. Court of Appeals for the Second Circuit authored the court's majority opinion, on which Judge Christopher Droney of the U.S. Court of Appeals for the Second Circuit joined. Judge Amalya Kearse of the U.S. Court of Appeals for the Second Circuit was the lone dissent.

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