U.S. authorities are taking on an alleged insider trading scheme that involves a former government official, partners at a hedge fund, and a federal agency employee.
The SEC has reported civil charges — and the U.S. Department of Justice (DOJ) has filed criminal charges — in an alleged insider trading scheme involving “tips of nonpublic information about government plans to cut Medicare reimbursement rates, which affected the stock prices of certain publicly traded medical providers or suppliers.”
The four alleged participants have been arrested and charged by the U.S. Attorney’s Office for the Southern District of New York with “participating in a scheme, from in or about 2012 through in or about 2014, to … defraud the United States, and to commit securities fraud and wire fraud for obtaining material nonpublic information from CMS [the Centers for Medicare and Medicaid Services, a federal agency] and using it to execute profitable trades at Investment Adviser-A.”
Neither the SEC nor the U.S. Attorney’s office has identified the hedge fund advisory firm they call “Adviser-A.” But it is, according to several media reports, New York City-based Deerfield Management, a privately held hedge fund investor that focuses on the health care sector, with an estimated $9.2 billion under management.
Jordan Fogel, defendant in insider trading case
Deerfield is cooperating with the investigation of the scheme, a firm spokesperson told Bloomberg. Separately, a Deerfield official did not reply to FTF’s emailed questions about the scheme, including whether or not Deerfield has changed or strengthened oversight or other procedures in the wake of the scheme’s exposure.
Meanwhile, the commission seeks “disgorgement of ill-gotten gains plus interest, penalties, and permanent injunctions” from the four men facing criminal and civil charges. They are David Blaszczak, Christopher Worrall, Theodore Huber and Jordan Fogel.
Huber and Fogel were Deerfield partners at the time of the alleged insider trading fraud.
Fogel is cooperating with the government, according to the DOJ, and has pled guilty to six counts. “Count One carries a maximum sentence of five years in prison. Counts Two and Three each carry a maximum sentence of 10 years in prison. Counts Four, Five, and Six each carry a maximum sentence of 20 years in prison,” point out DOJ officials.
The SEC complaint alleges that Blaszczak, a “former government employee turned political intelligence consultant, obtained key confidential details about upcoming decisions by the Centers for Medicare and Medicaid Services (CMS) from his close friend and former colleague at the agency, Christopher Worrall.”
David Blaszczak, consultant
Worrall, then a health insurance specialist at the CMS, “tipped Blaszczak about at least three pending CMS decisions that affected the amount of money that companies receive from Medicare to provide services or products related to cancer treatments or kidney dialysis,” alleges the SEC.
In turn, Blaszczak “allegedly tipped two analysts at a hedge fund advisory firm [Deerfield] that paid him as a consultant,” according to the commission.
The two analysts, Theodore Huber and Jordan Fogel, “allegedly used the nonpublic information [allegedly received from Blaszczak] to recommend that the firm trade in the stocks of four health care companies whose stock prices would likely be affected by the decisions once CMS announced them publicly. The alleged scheme resulted in more than $3.9 million in illicit profits.”
The political intelligence Blaszczak provided included “analysis about how changes in Government reimbursement rates would impact publicly traded healthcare-related companies,” the U.S. Attorney says in a statement.
“Worrall tipped Blaszczak because of their close personal friendship and in exchange for past and potential future pecuniary gain, including through employment or business opportunities, which were financially valuable to Worrall,” the SEC says. “For example, in September 2011, shortly before the first trading event … Blaszczak introduced Worrall to a contact at a healthcare policy firm who interviewed Worrall for a job in the private sector. Worrall did not take the job, but he used the opportunity to leverage a promotion at CMS in December 2012 that included a $10,000 raise and new supervisory responsibilities.”
“Over the course of more than one and a half years, this insider trading scheme involved at least three CMS announcements and trades in at least four issuers’ securities and yielded over $3.9 million in illegal profits to Adviser A-managed hedge funds,” the SEC complaint alleges. “Fogel and Huber received compensation from Adviser A [Deerfield] based in part on performance driven by the profits garnered through this insider trading scheme. Blaszczak’s firms received and renewed contracts, as well as bonuses … that also were driven by the profits generated by this scheme.”
For example, in 2012, according to the U.S. Attorney’s office, Blaszczak “improperly obtained confidential and material nonpublic information about CMS’s planned radiation oncology reimbursement cuts.” Blaszczak then passed that information to the other men, who used the information to “cause Investment Adviser-A to make profitable trades in public companies that would be adversely affected by the cuts.”
According to the SEC’s complaint, filed in U.S. District Court for the Southern District of New York, Blaszczak, Worrall, Huber, and Fogel violated the Securities Exchange Act of 1934 and the Securities Act of 1933. In all, the four men face more than 100 counts of securities fraud and wire fraud and, possibly, decades in prison. (A single count of securities fraud, for example, can draw up to 25 years behind bars.)
According to the SEC filing, Blaszczak worked at CMS from 2000 through 2005, before joining a series of consulting firms specializing in healthcare policy issues, while his friend Worrall, who started at CMS in 1999, is a health insurance specialist in the Center for Medicare, part of CMS.
Huber and Fogel both were healthcare analysts covering the medical devices sector for Deerfield.
“As alleged in our complaint, a federal employee breached his duty to protect confidential information by tipping a political consultant who then passed along those illegal tips,” Stephanie Avakian, acting director of the SEC Enforcement Division, says in a statement. “There’s no place on Wall Street or in our government for such blatant misuse of highly confidential information.”
