Deerfield Management Company, L.P., agreed to pay a fine of US $3.946 million to the Securities and Exchange Commission to resolve charges that, from 2012 through 2014, it failed to have and enforce policies and procedures reasonably designed to prevent the misuse of material, nonpublic information.
According to the SEC, during this time, the firm, an SEC-registered investment adviser, did not have policies and procedures that addressed the risk that its employees could use material, nonpublic information illicitly obtained from its research firms, particularly those specializing in political intelligence.
Previously, criminal charges were filed against five persons, including three Deerfield partners and analysts, for allegedly dealing in confidential proprietary information first obtained from a government official, passed along to a consultant, and then passed along to the three Deerfield partners who used the political intelligence to fashion trades for Deerfield-managed hedge funds. (Click here for background on the prior criminal and SEC action related to this matter in the article “Alleged Conduit to Hedge Fund for Confidential Non-Public Government Information Criminally Charged for Insider Trading Along with Three Fund Partners and Government Employee” in the June 4, 2017 edition of Bridging the Week.)
The SEC claimed that, although Deerfield had policies and procedures addressing information received from expert consultants, it did not have equivalent policies and procedures addressing information received from research firms. Research firms, said the SEC, were “required only to demonstrate that they ‘observe policies and procedures to prevent the disclosure of material non-public information or any information in breach of a duty'.” However, even this policy was not followed by Deerfield for all research firms, claimed the SEC.
Additionally, the SEC claimed that, during the relevant time, Deerfield did not act on red flags that it was potentially receiving information regarding confidential government decisions before public announcement.
To resolve this matter with the SEC, Deerfield agreed to disgorge profits of over US $800,000, including interest, in addition to paying a fine.