SEC, USAO Charge Four With Insider Trading Tied to Political Intelligence
The Commission resolved an earlier action against a political intelligence firm that had ties to the Centers for Medicare & Medicate Services or CMS by requiring admissions, a cease and desist order and revamped compliance procedures. The Order asserted allegations about the handling of information obtained from CMS and charged inadequate compliance procedures. In the Matter of Marwood Group Research, LLC, Adm. Proc. File No. 3-16970 (Nov. 24, 2015). The Commission did not resolve its newest case involving a political intelligence firm with ties to CMS. To the contrary, the agency named four individuals as defendants in an insider trading case as the Manhattan U.S. Attorney’s Office brought parallel criminal charges. SEC v. Blaszczak, Civil Action No. 1:17-cv-03919 (S.D.N.Y. Filed May 24, 2017).
Named as defendants are: David Blaszczak, formerly an employee of CMS who has worked for a series of consulting firms since 2005; Christopher Worrall, an employee of CMS since 1999 and long time friend of Mr. Blaszczak; Theodore Huber, a health care analyst for Adviser A; and Jordan Fogel, also a health care analyst for Adviser A.
The action centers on alleged tips of inside information by Mr. Worrall to Mr. Balaszczak about three significant rate changes at CMS between May 2012 and November 2013. CMS issues proposed and final rules that set the Medicare reimbursement rates for the following calendar year. The releases often impact the share price of firms that offer products and services covered by the impacted fee changes. Accordingly, the rate changes are made after the close of the market.
Mr. Worrall had access to material non-public CMS decisions concerning reimbursement amounts. Through his position at CMS Mr. Worrall monitored price changes. That position imposed a duty of confidentiality on Mr. Worrall. As a CMS employee he was subject to Section 21A(h) of the Exchange Act which imposes a duty of trust and confidence on executive branch employees to the U.S. Government and the citizens of the United States with respect to material, non-public information. The Section was added to the Exchange Act by the STOCK Act of 2012. CMS, in addition, has an Employee Nondisclosure Policy that imposed similar duties regarding “market sensitive” information. The Standards of Ethical Conduct for Employees of the Executive Branch fortified those duties.
Despite his obligations, in three instances over a period of about one and one half years, Mr. Worrall furnished inside information on CMS rate changes that lowered reimbursement rates to his friend and former co-worked, Defendant Blaszczak. The information on each occasion was transmitted in personal meetings, on the telephone, in emails and through text messages. In each instance the information was transmitted by Mr. Blaszczak to Mr. Huber and/or Mr. Forel who in turn caused Adviser A to enter into securities transactions on behalf of certain hedge funds. Mr. Worrall knew, or should have known, the information would be used for securities trading. Those transactions yielded over $3.9 million in trading profits.
Mr. Blaszczak knew or should have known that the information he obtained from his long time friend was material, non-public information, according to the complaint. He knew the position of his friend at CMS and the access he had to such information. He also touted his connection to CMS and those with information about the future actions of the agency. Mr. Worrall furnished the information to his former colleague in view of the long standing friendship of the two men. He was also aware that the relationship furnished him with certain business opportunities such as the prospect of leaving CMS and entering the consulting business. While he had considered potential opportunities he did not, during the period here, accept them. Mr. Worrall did, however, use one job offer he rejected to secure a significant pay increase at CMS.
Defendants Huber and Forell knew, or should have known that the information furnished to them by Mr. Blaszczak traced to CMS. Both men knew that Mr. Blaszczak had once been employed by the agency and that he maintained contacts with the CMS staff. They were also aware that the information he provided differed from that put out by other analysis and proved to be accurate. Indeed, they sought out Mr. Blaszczak to verify information for them.
Each of the men down the tipping chain also benefitted from the illegal trading as did Christopher Worrall. Adviser A paid Mr. Blaszczak’s firm just under $200,000 during the period for the information. Messrs. Huber and Forell are believed to have been compensated for the information resulting in the profitable trades, according to the complaint. That complaint alleges violations of Securities Act Section 17(a)(1) and Exchange Act Section 10(b). The SEC’s case, and that of the Manhattan U.S. Attorney’s Office, is pending.