The SEC’s current investigation into potential illegal tipping on Capitol Hill has ballooned into one of the largest insider trading cases in history as regulators are now probing whether as many as 44 hedge funds engaged in insider trading based on the information, according to recently released court documents.
Possible Illegal Government Tipping
Initially, regulators were focused on whether a congressional staffer, Brian Sutter, illegally passed on material nonpublic information about an upcoming Medicare rate change which led to a huge spike in the share prices of several healthcare stocks, including Aetna, Humana, UnitedHealth Group, and WellCare Health Plans.
According to court documents, at around 3 p.m. on April 1st 2013, Sutter called a lobbyist from Greenberg Traurig, where he allegedly discussed the upcoming Medicare rate changes.
The lobbyist then purportedly passed on this information to an analyst at Height Analytics, an independent policy oriented research firm based in Washington DC. The analyst then sent a note to his buy-side clients ahead of the official government announcement that Medicare would increase its reimbursements to some companies.
Thus far Sutter, and the House Ways and Means Committee, have fought the SEC’s subpoenaed for information regarding this investigation, arguing that congressional staff members are “absolutely immune” from having to comply with subpoenas from a federal regulator in an insider-trading probe.
The SEC, on the other hand, argues that Sutter’s action directly violates the 2012 STOCK Act passed by Congress that bars lawmakers and their staff from disclosing confidential nonpublic information about government matters that could move stock prices.
Investigation Turns To Hedge Funds
However, now the SEC has turned its attention to Height Analytics’ hedge fund clients who allegedly traded on the early notice of the Medicare reimbursement change.
In a July 16 declaration letter to the court, the SEC’s senior associate regional director for the New York region, Sanjay Wadhwa said that the investigation is now focused on “some of the largest hedge funds and asset management advisers in the nation.” Of the 44 hedge funds that are now under investigation in this matter, 25 are based in New York, one in Washington, and the others in California, Connecticut, Illinois and Massachusetts, among other states.
Although the SEC did not identify the specific hedge funds under investigation in court documents, the Wall Street Journal previously reported that Viking Global Investors and Point72 Asset Management (formerly known as SAC Capital Advisors) were two funds which traded ahead of the official government announcement on the Medicare reimbursement change on the hope that health insurance company stock prices would rise.
If government regulators were to pursue all of Height Analytics’ 44 hedge fund clients who are accused of trading on this inside information, the scope of the case would easily become the largest insider trading case in history.
Difficulties for the Regulators
While this insider trading case is an extremely high profile one, many market participants say that it is fraught with difficulties for the SEC and will not be an easy one to win on a number of grounds.
The first issue that regulators need to address is whether they can prevail in their suit against Brian Sutter and Congress, forcing them to provide the information requested by the SEC in its subpoena. This is the first time that regulators have used the 2012 STOCK Act to bring a suit directly against Congress.
However, maybe even more problematic for the SEC is whether they can successfully win an insider-trading case where investors traded on information which they did not clearly know where that information originated.
Legal experts claim that in order to violate insider-trading rules an investor must either know they are trading on material nonpublic information, or it must be proven that the investor acted recklessly in assuming that the information they based their trades on was obtained legally.
Ultimately the SEC’s case will hinge on whether the hedge funds should have known that the information in Height Analytics’ research note was an illegal stock tip rather than the result of on the ground research and a solid analytical conclusion.
In our minds, this case will clearly establish a number of important legal precedents for policy-oriented research, and we will have to wait and see how it progresses.