+ A
A -
NYT
For hedge funds, information is a valuable currency. A scrap of insight about a coming change in government policy can be as precious as any market data, potentially making the difference between a profit or loss on a trade.
As a result, political intelligence firms have proliferated inside the Beltway. But among the firms that traffic in information between Washington and Wall Street, one political insider's tips to a New York hedge fund crossed a bright line, the authorities said Wednesday.
The Washington consultant, David Blaszczak, and four other men were charged in an insider-trading scheme, accused of using confidential information about government financing to trade shares in the health care companies that would be affected by the changes.
Three current and former partners at Deerfield Management, a health care hedge fund firm, paid Blaszczak to provide inside information about policy decisions at the Centers for Medicare and Medicaid Services, leading to millions of dollars in illegal profits, federal prosecutors in Manhattan and securities regulators said.
While federal prosecutors have been investigating the case for more than a year, it is the most prominent insider-trading case to be filed by the U.S. attorney's office in Manhattan since its chief, Preet Bharara, was fired by President Donald Trump in March. The Centers for Medicare and Medicaid Services spend more than $1 trillion a year on health care programs for the elderly, disabled and lower income families and are major buyers of medical instruments, drugs and medical services.
Blaszczak, a former employee at the agency and founder of Precipio Health Strategies, was accused of pumping a friend at the agency for market-moving information that he passed to his clients at Deerfield, an unsealed indictment said.
In his interactions with the hedge fund partners, Blaszczak bragged about his access to the inside information.
In an email message, he said his analysis differed from that of one of his competitors because that competitor"doesn't know anyone at cms. His guesses are just wild random guesses," according to a separate complaint filed by the Securities and Exchange Commission.
The information involved tips about potential changes in government policy and regulations for things such as radiation therapy and kidney dialysis and how these policies would affect publicly traded companies.
Two of the partners, Rob Olan and Ted Huber, were named in the indictment Wednesday. Jordan Fogel, who worked at Deerfield from 2006 until last year, was charged separately and pleaded guilty this month. Federal prosecutors in New York contend the scheme generated $3.5 million in illegal profits.
The SEC said the information led to $3.9 million in illegal profits.
"Deerfield is committed to maintaining a strict culture of compliance and the highest ethical standards," Jonathan Gasthalter, a spokesman for Deerfield said in an emailed statement.
"We are cooperating fully with the government's investigation."
Huber's biography described him as a partner who"provides extensive research and analysis on individual companies operating in the health care industry."
Barry Berke, his lawyer, said in a statement that Huber denied wrongdoing and that"his research was based on detailed and rigorous analysis as well as the type of information regularly and properly relied upon by institutional investors in evaluating health care and medical companies." A biography for Olan on Deerfield's website described him as a"partner on the devices team at Deerfield since 2002."
David Esseks, Olan's lawyer, said,"Rob Olan is an innocent man and looks forward to clearing his name at trial."
Marc Mukasey, a lawyer for Fogel, said his client was"resolving this issue and looking forward to the future."
Blaszczak used a friend and former colleague, Christopher Worrall, a senior staff member at the Centers for Medicare and Medicaid Services, as his insider. Worrall would communicate"material, nonpublic information" about the agency's rate decisions through text messages, telephone calls and meetings, including some at the agency's offices, the SEC said. Blaszczak would pass the information to his hedge fund clients, sometimes within minutes of the communications, prosecutors said.
In email exchanges made public by federal prosecutors, Blaszczak and Worrall would exchange banter with clients about how much money they could make by collaborating. In one email exchange in 2014, Blaszczak told Worrall that they would"kill it working together."
Worrall responded:"You're like a drunk whore to me. Hard to resist. Lol. Let's talk."
A lawyer for Worrall, who was also charged, declined to comment. Blaszczak's lawyer did not respond to a request for comment.
Blaszczak was paid $193,000 for his information over a year and a half, according to the SEC. Federal prosecutors said Blaszczak was paid $263,000 in consulting fees between 2012 and 2014.
His name surfaced this year in the trial of Stefan Lumiere, a former Visium Capital Management employee, in a securities fraud trial. Christopher Plaford, a witness at the trial, testified that Blaszczak had provided him with confidential information that he used to make trades in two stocks.
In January, Lumiere was convicted on securities fraud charges of mismarking assets held in a Visium portfolio. The charges against Lumiere arose from a broader investigation into allegations of insider trading at Visium, a hedge fund that shut its door in the aftermath of the investigation and charges. Lumiere is the former brother-in-law of the Visium founder Jacob Gottlieb.
In the Visium case, the authorities said that some at the hedge fund had received inside information about the approval process for drugs from a former Food and Drug Administration employee-turned-consultant.
"As the second political intelligence case brought by the SEC and DOJ, this case underscores the government's focus on political intelligence firms and the need for investment professionals to closely monitor the sources of information that potentially emanates from government agencies," said Antonia Apps, a former federal prosecutor who oversaw several big insider-trading cases and is now a partner at the law firm Milbank.
