Consultant Found Guilty of Insider Trading with CMS – Policy & Medicine (blog)

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In May 2018, Washington, D.C. consultant David Blaszczak was convicted and found guilty of stealing secrets from the government and insider trading. A federal jury found that he provided private hedge fund clients with tops he learned from ex-colleagues that still worked in the government.

In addition to Blaszczak, three other defendants were found guilty: Christopher Worrall, Blaszczak’s friend and alleged source within CMS; Robert Olan, partner at Deerfield Management; and Theodore Huber, partner at Deerfield Management.

In its complaint, the government alleged that the four defendants engaged in insider trading using their various positions and gaining various benefits. Worrall allegedly “obtained material, nonpublic information about CMS’s reimbursement rate decisions before the agency released its decisions to the public” and would then communicate “specific, material, nonpublic information regarding the rate changes to his close friend and former colleague, Blaszczak, through text messages, telephone calls, and in-person meetings, including meetings at CMS.”

The government further alleges that, “Blaszczak worked at a series of Washington, D.C.-based consulting firms that specialize in providing “political intelligence.” In each instance, Blaszczak provided the material, nonpublic information obtained from Worrall to Huber and/or Fogel, analysts at Adviser A, which was one of Blaszczak’s clients. Fogel and Huber then caused Adviser A to place trades on behalf of certain hedge funds based on this information, yielding over $3.9 million in illegal profits.”

In its complaint, the government alleges that shortly after Worrell and Blaszczak would communicate, Blaszczak would communicate with either a Deerfield partner by telephone and/or email. Following those communications, Adviser A would begin to trade securities on behalf of one or more funds it managed in companies that would be affected by the rate-setting rules.

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Blaszczak’s lawyers claimed his success in predicting CMS actions was the result of exhaustive research based on publicly available information, not tips from a government mole. Defense lawyers called Fogel a liar and questioned why Worrall, who received no money for the alleged tips, would risk his career for nothing.

Interestingly, the star witness for the government was Jordan Fogel, a former Deerfield partner who pled guilty and in a bid for leniency, testified that the management company used Blaszczak to obtain an illegal edge, trading ahead of government announcements. Fogel told jurors that Blaszczak passed along frequent updates as CMS considered the reimbursement changes, information that was often at odds with public expectations.

By one example, Deerfield used the information from Blaszczak to take a profitable short position in the shares of Fresenius Medical Care AG, according to Fogel.

Additionally, two days prior to the start of the trial, Deerfield produced a document that lends support to the government’s claim that others knew and believed Blaszczak was getting confidential information from CMS. The document – a 2007 email titled “Morning Meeting Notes – Anything to add?” was from Alexander Karnal (a partner and portfolio manager at Deerfield) and seems to discuss more than a dozen different deals and stocks. The email included the line, “Blaszczaks comments pre-news suggest he had a read of draft documents”

Deerfield Management agreed to pay $4.6 million in August to settle U.S. Securities and Exchange Commission allegations that it failed to properly supervise its employees. It didn’t admit or deny the allegations.

Deerfield is the second fund with ties to Blaszczak to find itself facing scrutiny. Last year, in the trial of a former credit portfolio manager at Visium Asset Management, Blaszczak’s name surfaced as the source of insider tips that were used by that firm to shape strategy.