SUMMARY

A recent SEC court filing confirmed the existence of enforcement investigations into a potential violation  of the Stop Trading on Congressional Knowledge (STOCK) Act.  In a subpoena enforcement action filed  against the House Ways and Means Committee and the staff director of its Health Subcommittee, the  SEC revealed details of criminal and civil insider trading investigations arising from a potential leak of  reimbursement rates announced by the U.S. Centers for Medicare and Medicaid Services (CMS) after the  close of the stock market on April 1, 2013.  News of the rates, which were more favorable than expected,  lifted certain healthcare stocks. 

The SEC, the FBI, and the Inspector General of the U.S. Department of Health and Human Services are  investigating  whether government sources made unauthorized advance disclosure of the rates to a  lobbyist, who passed the information on to a broker-dealer and to various market participants.

The SEC filing reveals not only enforcement interest in a matter that received substantial press attention  last year, but also that the authorities are bringing to bear some of the same techniques employed in  traditional insider trading cases.  In addition, the Ways and Means Committee’s objection to complying  with an SEC subpoena based on the Speech or Debate Clause reflects the difficulty that enforcement  authorities may face in proving insider trading cases involving government-sourced information.

DISCUSSION

Securities Exchange Act Section 10(b) and Rule 10b-5 impose liability for trading on material nonpublic  information that is provided in breach of a duty to keep it confidential. Signed into law in 2012, the STOCK Act imposed on members and employees of Congress (as well as Executive and Judicial Branch  personnel) a duty “to the United States government and the citizens of the United States” with respect to  material nonpublic information that they obtain in their official capacities.1 As discussed in our April 2012  memo on the STOCK Act, government tippers and their tippees can be held liable under traditional  insider trading principles for trading on government-sourced information that is provided in breach of a  duty to keep it confidential.

The investigations described in the SEC filing appear to arise from a “flash report” sent by Height  Securities, LLC to nearly 200 clients shortly before the market closed on April 1, 2013.  The report  provided advance notice of a CMS policy change regarding Medicare reimbursement rates and  highlighted two stocks it predicted would benefit from the expected announcement. Humana stock  increased approximately 7% between the time the flash report was issued at approximately 3:40 p.m.  EST and the market close. According to the SEC filing, the source for the report may have been an email  from a lobbyist at Greenberg Traurig LLP, who told the SEC that he had spoken about the CMS  announcement with Brian Sutter, a House Ways and Means Committee staffer (now subcommittee staff  director), 10 minutes before sending the email.

The lobbyist’s email to Height Securities, which cited “very credible sources” on the upcoming  announcement, indicated that CMS had changed its reimbursement methodology to assume that  Congress would eventually act to prevent a scheduled reduction in Medicare physician payment rates, as  it had done previously; as a result, certain payments that were expected to decline 2.3% from the prior  year would instead increase by 3.5%.

According to its court filing, the SEC initiated its insider trading investigation into the source of the Height  Securities flash report on April 9, 2013, just days after the CMS announcement. In January 2014, the  SEC requested documents and an interview with Sutter. The Committee and Sutter resisted the SEC’s  requests on various grounds, including the Speech or Debate Clause of the U.S. Constitution, which  provides that members of Congress “for any Speech or Debate in either House . . . shall not be  questioned in any other place.”2 The SEC issued subpoenas to both on May 6, 2014, demanding  testimony from Sutter and documents from both Sutter and the Committee, including Sutter’s  communications with CMS, Sutter’s communications with Greenberg Traurig, Sutter’s personal and work  phone numbers and email addresses, Sutter’s work phone records, and Sutter’s communications related  to the confirmation of a new CMS Administrator, which had been linked to the CMS policy change in the  lobbyist’s email to Height. The SEC made limited efforts to compromise with the House Counsel but  refused to commit to “end the Committee’s and Mr. Sutter’s involvement in this matter” as a condition of  reviewing documents, as the House Counsel had proposed in a letter on June 17. The SEC filed its subpoena enforcement action  in the United States District Court for the Southern District of New York on  June 20.

The SEC filing described evidence suggesting that Sutter was the source of the disclosure, including  emails indicating that Sutter had communicated with at least two individuals at CMS in the week prior to  the announcement, and alluded to additional information linked to Sutter protected by a confidentiality  agreement. The filing indicated that the lobbyist had spoken with the SEC and confirmed discussing the  CMS announcement with Sutter in their April 1 phone call. The SEC also revealed further details of  Sutter’s relationship with the lobbyist, including Sutter’s conversations with a colleague of the lobbyist  over the previous month and emails between Sutter and the lobbyist on the day of the announcement  arranging a phone call. 

The filing also suggests that Sutter provided false exculpatory information to the FBI in an interview.   News reports indicated that the interview took place at Sutter’s home in the evening without counsel  present. The SEC highlighted a letter from the House Counsel indicating that after “some time for  reflection,” Sutter’s recollection of the events had changed from what he had told the FBI several weeks  after the incident. It appears Sutter has not provided further information to authorities since the FBI  interview.

IMPLICATIONS

The SEC filing confirms the government’s interest in pursuing a STOCK Act claim—an issue which was  the subject of public speculation after disclosure of this incident last year.  Although enacted with fanfare,  in the two years since the passage of the STOCK Act, there have been no civil or criminal cases brought  based upon it.

The government appears to be employing many of the same aggressive investigative techniques that it  has used with success in recent, traditional insider trading investigations.   For example, the FBI appears  to have confronted Sutter at his home (presumably without prior announcement), a tactic that it has  touted as being effective in inducing confessions and  cooperation.  Here, the SEC seems to draw an  adverse inference from the fact that Sutter apparently provided false denials in that interview.  The SEC  has also evidently received significant cooperation from the lobbyist.

That the SEC has filed a subpoena  enforcement action in the face of an assertion of a constitutional  privilege claim by the Ways and Means Committee reflects an aggressive approach, and a willingness to  devote substantial resources to the investigation of this matter.

The resistance of the Committee and Sutter to the subpoenas highlights the difficulty associated with  investigating congressional sources of information. The Speech or Debate Clause of the Constitution  provides “absolute” protection for all congressional activities that fall “within the sphere of legitimate legislative activity,”3 but has not been held to protect conduct “not a part of the legislative process itself.”4 Such cases outside the scope of the Clause generally have involved bribery or similar crimes. It remains  unclear whether the Clause could block enforcement of subpoenas based on potential Exchange Act  violations, particularly where Congress amended the Exchange Act to empower the Executive Branch to  pursue members of Congress and their staffs for sharing material nonpublic information inappropriately.