New York, NY – An SEC investigation into whether anyone in the government illegally passed along inside information to a political intelligence firm about a pending government decision on Medicare payments, has hit a pot hole say officials involved in the probe.
Background of the Case
The investigation by the SEC and FBI is focused on whether government officials passed on inside information to a lobbyist from law firm Greenberg Traurig regarding the Centers for Medicare and Medicaid Services’ (CMS) reversal of a decision to cut Medicare Advantage payments.
Some suggest this lobbyist passed on information about the pending change to an analyst at Washington-based policy research firm Height Securities, who released a note on April 1st to clients explaining he expected CMS to reverse their prior decision. This note propelled health-insurance stocks 6% higher in the final minutes of trading that day. CMS announced the reversal of their decision at 4:24 pm after the note went out.
The Wall Street Journal broke a news story on this case on April 17th. For more details about this case, refer to the following blog post Integrity Research wrote on this topic http://www.integrity-research.com/cms/2013/04/22/political-intelligence-firm-investigated-for-potential-insider-trading-violation/
In the wake of this scandal, investigators from the SEC, FBI, and the Senate have spoken with officials at Height Securities, Greenberg Traurig, related health-insurance companies, and the Senate about these developments.
In fact, shortly after this story broke Senator Chuck Grassley (R, Iowa) spoke aggressively about the need for Congress to pass legislation regulating the political intelligence industry on the floor of the Senate (www.integrity-research.com/cms/2013/05/13/grassley-on-political-intelligence/) and then mounted his own investigation into the Height matter. Senator Grassley has gone strangely quiet on the subject in recent months.
Officials involved with the investigation have determined that a number of government employees knew about the decision before it was made public.
The STOCK Act of 2012 included specific language establishing a “duty of trust and confidence” for Congress or their staffers to keep inside information gathered in the course of their jobs confidential. They are also prohibited from trading stocks on this information.
Despite this fact, investigators are struggling with this case because they are finding it difficult to determine whether anyone who knew about the CMS reversal actually broke the law by passing along this nonpublic information, or if the information is something they would normally share in the course of their duties with lobbyists and others regarding potential regulations.
George Canellos, co-chief of the SEC’s enforcement division, recently said at an NYU law school speech that determining if anyone in Congress violated a duty to keep information confidential “is probably the toughest and most challenging issue and varies very much on facts and circumstances.”
This issue is based in part on the “speech and debate” clause in the Constitution which specifically protects lawmakers and their aides from prosecution for engaging in what it terms legislative conduct.
In our opinion, the difficulty that federal investigators are having with the CMS case suggests that the language included in the STOCK Act establishing a “duty of trust and confidence” on the part of Congress and their staff is extremely limited.
We would guess that regulators might be able to make a case if a member of Congress or their staff were to trade based on nonpublic information obtained in the course of their jobs. We also suspect they would not be held accountable for providing nonpublic information to others (including institutional investors) who then traded on this information.
However, this does not mean the political intelligence industry is getting a pass. According to officials involved in the process the SEC, FBI and Justice Department are continuing to investigate the political-intelligence business more broadly to determine if any enforcement action is warranted.