A few weeks ago the Wall Street Journal published a story revealing that a former CMS employee and political intelligence consultant has become the target of a federal probe into numerous extremely lucrative tips he has provided to hedge funds over the years.
According to the WSJ article, federal documents released in June by the Department of Justice and the Securities Exchange Commission in relation to an insider trading investigation of Sanjay Valvani who formerly worked for Visium Asset Management refer to a ”co-conspirator” and “political consultant” who allegedly provided material information to Valvani in May 2013.
Purportedly, this consultant told Valvani that the government would cut funding for health-care services providers, prompting shares of these companies to fall. Within a month, the government announced these cuts, earning Visium $285,000 in profit.
Sources familiar with the probe said the consultant referred to in this investigation is well-known healthcare policy research analyst, David Blaszczak. Mr. Blaszczak interned at the Food and Drug Administration before joining the Centers for Medicare and Medicaid Services in 2000. After five years at CMS, he left to spend a decade working for a number of policy-research firms, most recently Precipio Health Strategies, a firm he founded.
As part of this investigation, Mr. Blaszczak has been accused of offering sources private-sector jobs in exchange for information he could then provide to hedge fund clients. If the allegations are viewed as quid pro quo by prosecutors, Mr. Blaszczak could be indicted for insider trading.
Mr. Blaszczak’s alleged tip to the Visium manager is one part of a broad federal investigation of Mr. Blaszczak himself, said the people familiar with the probe. Blaszczak has apparently cooperated in the government’s investigation.
The most recent government probe is not the first time that Blaszczak has been investigated for the information he has provided hedge fund clients. In 2014, Blaszczak became the target of an SEC investigation into whether he received tips from other CMS staffers on a number of developments related to Medicare.
In 2006, while working at Washington Research Group, Mr. Blaszczak issued a research report correctly predicting steep cuts in hospital-reimbursement rates for some procedures involving medical-device companies.
On June 29, 2010, while working for independent policy research firm Potomac Research Group, Mr. Blaszczak issued a research note predicting that CMS would likely review its coverage limits for Dendreon’s Provenge. The company’s shares sank nearly 10% that day, closing at $33.59 on unusually high volume. CMS issued its formal “National Coverage Determinations” (NCD) notice publically indicating it would review Provenge coverage limits on the following day – June 30th, 2010.
On July 2, 2012, Blaszczak predicted “significantly higher than expected” funding cuts for a specific type of radiation therapy, explaining that CMS had lowered its estimate for treatment duration from 60 minutes to 30 minutes. Blaszczak estimated a 20% reduction in CMS funding for this treatment in 2013. Shortly thereafter, CMS announced a 19% cut in funding due to reducing radiation treatment time to 30 minutes.
In the midst of the 2014 investigation, Mr. Blaszczak explained the accuracy of his research calls in a written statement, “I only use public information in preparing all my reports. I am proud of my record, and if needed, will vigorously fight any false allegation.”
Despite the numerous circumstances where Blaszczak showed uncanny accuracy in his research, we still don’t see a clear “smoking gun” the government can use to bring a successful insider trading case against him. However, the fact that Blaszczak has enjoyed consistent and ongoing contact with numerous former colleagues at CMS and he purportedly offered some of his sources potential private sector jobs is troubling.
Unfortunately, the government has never won an insider trading case it has brought against a policy research or political intelligence firm. The November, 2015 Marwood Securities case was settled with Marwood agreeing to pay a $375,000 penalty for compliance failures relating to leaking material non-public information, though the firm did not admit guilt.
The real question is whether Blaszczak is getting his tips from CMS staffers with inside knowledge of these decisions or whether he is doing his own analysis. We also wonder if Blaszczak is receiving information about these moves from the dozens of lobbyists or other Washington insiders who are legitimately informed of these decisions before CMS makes them public. Regardless, we suspect that the government may find it as difficult in winning an insider trading conviction against Blaszczak as it has with other political intelligence firms.