Government Leaks Lead to Landmark Insider Trading Case

Ken Herzinger is Partner and Stephanie Albrecht is Managing Associate at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication by Mr. Herzinger and Ms. Albrecht.

On May 24, 2017, the SEC for the first time brought charges based on allegations of insider trading on confidential government information. The alleged insider trading scheme involved tips related to three announcements by the Center for Medicare & Medicaid Services (“CMS”) regarding non-public rate changing decisions affecting the stock of issuers in the healthcare industry.

The complaint alleges that from May 2012 to November 2013, Christopher Worrall, a health insurance specialist in the Center for Medicare (“CM”), the CMS component that administers Medicare’s national payment systems and determines Medicare reimbursement rates, tipped his long-time friend David Blaszczak about internal deliberations and planned actions of CMS. Blaszczak is a consultant specializing in healthcare policy issues and a former CMS employee.

Each year, CMS issues proposed and final rules setting the reimbursement rates Medicare makes to healthcare providers for services related to cancer treatments or kidney dialysis for the following year, which generally impact the stock prices of affected companies. By virtue of his position in the CM Director’s Office, Worrall had access to material, non-public information about CMS’s reimbursement rate decisions before those decisions were released to the public. The complaint alleges that Worrall shared inside information about three different CMS announcements with Blaszczak via text messages, phone calls and in-person meetings, in violation of his duties of trust and confidence as an executive branch employee. According to the SEC, as a former CMS employee, Blaszczak was familiar with a CMS employee’s duty to keep non-public information confidential. Worrall allegedly tipped Blaszczak because of their close personal friendship and in exchange for past and future employment opportunities that were financially valuable to Worrall. For example, the SEC alleges that Blaszczak set Worrall up with a job interview in the private sector that Worrall leveraged to obtain a promotion at CMS.

The complaint further alleges that Blaszczak in turn tipped defendants Theodore Huber and Jordan Fogel, healthcare analysts covering the medical device sector at a hedge fund investment advisory firm that is one of Blaszczak’s clients. According to the SEC, Fogel and Huber knew or should have known that the information had been communicated in breach of a duty because they knew Blaszczak had a source within CMS. Nonetheless, Fogel and Huber allegedly recommended that their firm place trades in four issuers’ securities on behalf of their hedge fund clients, yielding over $3.9M in illicit profits. The firm paid Blaszczak $193,000 for the inside information.

The SEC’s complaint, filed in the Southern District of New York, charges Blaszczak, Worrall, Huber, and Fogel with violations of Section 10(b) of the Exchange Act, Rule 10b-5 thereunder, and Section 17(a)(1) of the Securities Act. The SEC is seeking disgorgement, prejudgment interest, civil penalties, and permanent injunctions. The U.S. Attorney’s Office for the Southern District of New York has brought related criminal charges.

This is the first time that the SEC has brought charges on a tip from a government employee about inside government information and could signal the SEC’s new focus on government information. In its press release announcing the charges, the SEC emphasized government employees’ duties of trust and confidence, noting that “a federal employee breached his duty to protect confidential information by tipping a political consultant who then passed along those illegal tips,” and that “[t]here’s no place on Wall Street or in our government for such blatant misuse of highly confidential information.” This apparent focus on government information raises interesting issues given the recent flurry of media reports about government leaks and could have far-reaching implications for government employees. This case also shows that insider trading charges are alive and well under the new Trump administration.

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