The SEC is currently investigating three separate insider trading cases which focus on whether the Centers for Medicare and Medicaid Services (CMS) leaked confidential information to boutique policy research firms who passed on this information to hedge fund clients, prompting significant price swings in health care stocks.
CMS & Marwood Group
The first case that the SEC is looking into is whether employees at CMS leaked information to policy research firm Marwood Group LLC about CMS’s pending review of Dendreon Corp’s prostate cancer treatment called Provenge.
Despite the fact that Provenge costs approximately $93,000 per person, the government is obligated to cover this drug for Medicare patients. However, CMS has the authority to set coverage limits in situations where it feels the benefits of the treatment are unclear.
The reason for the SEC’s investigation is Dendreon’s stock price fell 10% on June 7, 2010 shortly after CMS officials decided to review whether coverage limits should be applied to Provenge. Over the course of June 2010, Dendreon’s share price fell more than 26%.
Federal investigators are looking into whether officials at policy research firm Marwood Group contacted hedge fund clients with confidential information they obtained about CMS’s decision to review Provenge coverage. The SEC is also supposedly examining whether Marwood Group obtained inside information from CMS employees in other instances.
A spokesman from Marwood said the firm “has cooperated fully with the SEC’s inquiry and demonstrated to the SEC that we knew nothing about the CMS announcement on Provenge beforehand, and that we were completely surprised by it.”
CMS & Blaszczak
The second SEC investigation is focused on whether highly respected health-care policy analyst and former CMS employee, David Blaszczak, received tips from other CMS staffers on a number of developments related to Medicare.
In 2006, Mr. Blaszczak, who left CMS the previous year, issued a 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.
Mr. Blaszczak, who has since left Potomac to set up his own research boutique, explained the accuracy of his research calls recently 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.”
CMS & Height Securities
The SEC is simultaneously investigating whether CMS employees leaked material non-public information concerning an April 1, 2013 announcement of Medicare reimbursement rates to boutique policy research firm Height Securities before the official CMS announcement and whether any of their hedge fund clients traded on this information.
Less than an hour before CMS released its formal announcement on April 1st, Height Securities sent out an email alert to more than 150 buy-side clients predicting that CMS would turn a suggested 2.2 percent cut for Medicare Advantage providers in 2014 into a 3.3 percent pay increase. After markets closed CMS issued a press release confirming the pay cut reversal, which prompted the SEC to investigate whether the alert issued by Height Securities violated securities regulations and whether anyone broke insider-trading rules by leaking CMS’ decision.
Impact for Research Industry
Clearly, with the three cases currently being investigated, the SEC is trying to put increased pressure on government agencies, lobbyists, boutique research firms and their hedge fund clients about the handling of material nonpublic information obtained from government insiders.
In our view, the SEC is trying to use these cases to establish a legal precedent based on the 2012 STOCK Act that insider trading can be charged if federal agency employees, lawmakers, or their staff discloses confidential nonpublic information about government matters that could move stock prices.
While we suspect the SEC will have difficulties proving these cases for a variety of reasons, we would not be surprised if buy-side investors became increasingly nervous about using potentially risky “political intelligence” like the information discussed in the three cases mentioned above for fear of having their funds included in a front-page article in the Wall Street Journal or Washington Post about a pending government investigation.