Political Intelligence Consultant, CMS Official, Guilty of Insider Trading
A political intelligence consultant, a former employee at the Centers for Medicare and Medicaid Services or CMS, and two partners at a New York hedge fund were found guilty by a jury on charges of conspiracy, securities fraud and wire fraud centered on an insider trading scheme following a four week trial. U.S. v. Blaszczak, No. 1:17-cr-00357 (S.D.N.Y. Verdict May 4, 2018). See also SEC v. Blaszczak, Civil Action No. 1:17-cv-03919 (S.D.N.Y. Filed May 24, 2017).(parallel Commission enforcement action).
The Defendants convicted are: David Blaszczak, a political intelligence consultant and former CMS employee; Christopher Worrall, an employee of CMS since 1999 and long time friend of Mr. Blaszczak; and Theodore Huber and Robert Olan, partners and analysts at Deerfield Management Company, L.P., a healthcare-focused hedge fund in New York. Previously, Jordan Fogel, also a health care analyst at Deerfield, pleaded guilty to criminal charges and settled claims with the SEC. He entered into cooperation agreements with the U.S. Attorney’s Office and the SEC.
While the facts in the action trace to about 2009, it 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, according to papers in the criminal case and the SEC’s complaint. 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 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 conveyed by Mr. Blaszczak to those at Deerfield which then traded securities on behalf of certain funds. The trading resulted in over $3.9 million in illicit trading profits.
The information Mr. Blaszczak obtained from his friend was material, non-public information. Mr. Blaszczak knew the position of his friend at CMS and the access he had to such information. He touted his connection to CMS. 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.
Those at Deerfield understood that the information furnished by Mr. Blaszczak traced to CMS. Those at Deerfield 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. In fact, 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 Mr. Worrall. Deerfield, where Messrs. Huber and Olan were partners, profited from the trades. The date for sentencing has not been set.
Mr. Blaszczak is also charged in a separate insider scheme. There he is alleged to have obtained confidential and nonpublic CMS information about cuts in reimbursement rates for home health products. Mr. Blaszczak is allged to have furnished that information to a portfolio manager at Visium Asset Management, L.P., another healthcare-focused hedge fund in New York City. That fund executed trades while in possession of the inside information, reaping profits of about $330,000. Christopher Plaford, the portfolio manager at Visium, has pleaded guilty and is cooperating with the government. The SEC’s enforcement action, which alleges violations of Securities Act Section 17(a)(1) and Exchange Act Section 10(b), is pending.