SEC And U.S. Attorney's Office Continue Their Pursuit Of Criminal Actions Against Purveyors Of 'Political Intelligence'

On May 24, 2017, the United States Attorney's Office for the Southern District of New York and the Securities and Exchange Commission (SEC) launched their latest criminal and civil salvos against prohibited insider trading by charging that secret government information - inside "political intelligence" - was criminally used, in violation of the Stop Trading on Congressional Knowledge Act (STOCK Act), for illicit personal enrichment. The government's indictment and the SEC's civil complaint charge that an insider at the federal Centers for Medicare and Medicaid Services (CMS) tipped a former government colleague, current consultant, and "friend," who in turn tipped two hedge fund health care analysts, to illegally work a scheme that generated $3.9 million in profits. The consultant's political intelligence firms received $263,000 in "consulting fees" from the hedge fund. While the facts of the case suggest a familiar pattern of using material non-public information (MNPI) for trading gains, the fact that the agencies are expanding their efforts into the realm of political intelligence creates new cause for concern at such firms.

What is clear is that political intelligence firms will need to be as vigilant in adopting rigorous insider trading policies as are expert network firms and other purveyors of "inside insights," whether material information is disclosed by private industry or government insiders.

Prior Enforcement Actions Under the STOCK Act

As we have previously chronicled, the STOCK Act explicitly applies federal insider trading laws to congressional members and staffers. In classic insider trading cases, liability arises for both the insider (one who breaches his or her fiduciary duty to the company by trading on MNPI, or disclosing it for a personal benefit) and for the "tippee" (one who trades on that information, knowing it has, at one time, been disclosed in exchange for a personal benefit). Enforcement of the STOCK Act, however, has raised serious concerns regarding what exactly is "non-public" information in the political realm and what is a "personal benefit" for a government employee.

Since the STOCK Act became law, the SEC has investigated, inter alia, legislative staffers for providing tips about an unexpected increase in Medicare reimbursements, and executive agency staffers who tipped investment analysts about the CMS's investigation of Medicare coverage for an immunotherapy drug as well as concerns about a potential new diabetes drug. In this most recent indictment, the government has now expanded its focus to sights on tipped information from a government insider, in this case regarding a regulatory rules change from the CMS. Each of these investigations suggests an aggressive push by the SEC (and, in many cases, the DOJ) to a new realm of insider trading prosecution: tipping of (non-public) government information to political intelligence firms that advise institutional investors or, in some cases, institutional investors directly.

Facts from the Blaszczak/Worrall Indictment

On May 24, 2017, the SEC filed a complaint in the Southern District of New York against David Blaszczak, Christopher Worrall, Theodore Huber, and Jordan Fogel, alleging they illegally engaged in insider trading based on material non-public government information, in violation of...