Late last year, the Second Circuit dramatically expanded the circumstances under which a tipper can be held criminally liable for insider trading.  United States v. Blaszczak, 2019 WL 7289753(2d Cir. 12/30/19).  Based upon precedent established by the Supreme Court in Dirks v. SEC, 463 U.S. 646 (1983), insiders typically escaped both civil and criminal liability for insider trading under the Securities Exchange Act unless the Government could prove that the tipper breached a duty not to disclose in return for a personal benefit, and that the tippee knew that the tipper had done so.  The “personal benefit” requirement was engrafted upon insider trading law by the Supreme Court even though it was not explicitly set forth in the underlying statute.

In Blaszczak, the defendants were indicted not only for insider trading under Title 15 of the Securities Exchange Act, but also for both wire fraud and insider trading under Title 18 of the Sarbanes-Oxley Act.  After trial, the District Court instructed the jury that a conviction under the latter two statutes did not require proof of a personal benefit to the tipper or the tippee’s knowledge of that benefit.  As a result, defendants were acquitted under Title 15, but convicted of wire fraud and insider trading under the Sarbanes-Oxley Act.  On appeal, the Second Circuit affirmed in a 2-1 decision.  

The Second Circuit posed the issue presented as follows:

Under Dirks, an insider may not be convicted of Title 15 securities fraud unless the government proves that he breached a duty of trust and confidence by disclosing material, nonpublic information in exchange for a “personal benefit.”  463 U.S. at 663. Similarly, a tippee may not be convicted of such fraud unless he utilized the inside information knowing that it has been obtained in breach of the insider’s duty. . . . Here, Defendants claim that the district court erred by not instructing the jury that Dirks’s personal-benefit test also applied to the wire fraud and Title 18 securities fraud counts.  In essence, Defendants argue that the term “defraud” should be construed to have the same meaning across the Title 18 fraud provisions and Rule 10b-5, so that the elements of insider-trading fraud are the same under each of these provisions.  We disagree. (Citations omitted.)

The Court set forth its rationale as follows:

We begin by noting what the Title 18 fraud statutes and Title 15 fraud provisions have in common:  their text does not mention a “personal benefit” test. Rather, these provisions prohibit, with certain variation, schemes to “defraud.”  18 U.S. §§ 133, 1348(1); 17 C.F.R. § 240.10b-5(a); see 18 U.S.C. § 1348(2) (prohibiting schemes to obtain certain property “by means of false or fraudulent pretenses”); 15 U.S.C. § 78j(b) (prohibiting the use of any “manipulative or deceptive device”).  For each of these provisions, the term “defraud” encompasses the so-called “embezzlement” or “misappropriation” theory of fraud. . . .

While the Title 18 fraud statues and Title 15 fraud provisions thus share similar text and proscribe similar theories of fraud, these common features have little to do with the personal-benefit test.  Rather, the personal-benefit test is a judge-made doctrine premised on the Exchange Act’s statutory purpose. As Dirks explained, in order to protect the free flow of information into the securities markets, Congress enacted the Title 15 fraud provisions with the limited “purpose of . . . eliminate[ing] [the] use of inside information for personal advantage.”  463 U.S. at 662 (emphasis added) (internal quotation marks omitted).  Dirks effectuated this purpose by holding that an insider could not breach his fiduciary duties by tipping confidential information unless he did so in exchange for a personal benefit. . . . .

But once untethered from the statutory context in which it arose, the personal-benefit test finds no support in the embezzlement theory of fraud recognized in Carpenter.  In the context of embezzlement, there is no additional requirement that an insider breach a duty to the owner of the property, since “it is impossible for a person to embezzle the money of another without committing a fraud upon him.”  Grin, 187 U.S. at 189.  Because a breach of duty is thus inherent in Carpenter’s formulation of embezzlement, there is likewise no additional requirement that the government prove a breach of duty in a specific manner, let alone through evidence that an insider tipped confidential information in exchange for a personal benefit. . . .  In short, because the personal-benefit test is not grounded in the embezzlement theory of fraud, but rather depends entirely on the purpose of the Exchange Act, we decline to extend Dirks beyond the context of that statute.


Our conclusion is the same for both the wire fraud and Title 18 securities fraud statutes.  While is true that Section 1348 of Title 18, unlike the wire fraud statute, concerns the general subject matter of securities law, Section 1348 and the Exchange Act do not share the same statutory purpose. . . .  Indeed, Section 1348 was added to the criminal code by the Sarbanes-Oxley Act of 2002 in large part to overcome the “technical legal requirements” of the Title 15 fraud provisions. . . . In particular, Congress intended for Section 1348 to “supplement the patchwork of existing technical securities law violations with a more general and less technical provision, with elements and intent requirements comparable to current bank fraud and health care fraud statutes.”  S. Rep. No. 107-146, at 14. Given that Section 1348 was intended to provide prosecutors with a different – and broader – endorsement 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.  (emphasis omitted.)

This new expansion of the law opens the door to prosecution for insider trading even when there is no evidence of a personal benefit to the tipper.  There is no question but that we will see the number of such prosecutions increase.

Joe DiBenedetto recently retired from Winston & Strawn LLP, after spending 46 years in its Manhattan office as a capital partner specializing in commercial litigation. He formed JDB Mediation LLC to further develop his mediation and arbitration practice, which is centered in Manhattan and its surrounding counties (including Westchester, Nassau, and Suffolk). Joe DiBenedetto’s experience, training, and other credentials are more fully described at