Why it matters: May 2017 saw two announcements of financial crimes committed by government employees. On May 24, an employee of the Centers for Medicare & Medicaid Services (part of the U.S. Department of Health and Human Services) was charged in an extensive insider trading scheme with passing on nonpublic information relating to government plans to cut Medicare reimbursement rates. Earlier, on May 9, a former Securities and Exchange Commission Division of Corporation Finance branch chief pled guilty to making false statements in his annual Office of Government Ethics Confidential Financial Disclosure Reports and internal SEC certifications of holdings in order to conceal his trading in prohibited securities and options. As one government official said in connection with the insider trading case, but which is equally applicable to the prohibited trading case, “We continue to hold federal government employees accountable and to the highest standards of conduct and integrity.”
Detailed discussion: May 2017 saw two announcements of financial crimes committed by government employees, summarized below.
Insider trading by Centers for Medicare & Medicaid Services employee: On May 24, 2017, the SEC announced charges against four individuals in an alleged insider trading scheme in which Christopher Worrall, a health insurance specialist at the Centers for Medicare & Medicaid Services (part of the U.S. Department of Health and Human Services), gave key confidential details about upcoming CMS decisions to David Blaszczak, a close friend and former CMS employee who had left the agency to become a “political intelligence consultant.”
The SEC said that the key confidential details related by Worrall to Blaszczak involved “tips of nonpublic information about government plans to cut Medicare reimbursement rates, which affected the stock prices of certain publicly traded medical providers or suppliers” and included information about “at least three pending CMS decisions that affected the amount of money that companies receive from Medicare to provide services or products related to cancer treatments or kidney dialysis.” In turn, Blaszczak allegedly passed on the tips to two analysts, Theodore Huber and Jordan Fogel, at the healthcare-focused hedge fund advisory firm that paid Blaszczak as a consultant. Huber and Fogel then allegedly used the tips to “recommend that the firm trade in the stocks of four health care companies whose stock prices would likely be affected by the decisions once CMS announced them publicly,” resulting in more than $3.5 million in illicit profits.
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York simultaneously announced the arrest and filing of criminal charges against Worrall, Blaszczak, Huber and a fourth analyst at the hedge fund, Robert Olan. The Department of Justice said that Fogel had pled guilty and was cooperating with government investigators.
According to both the SEC’s and DOJ’s press releases, Worrall began working at CMS in 1999 and was in the Director’s Office for the Centers for Medicare, which gave him “broad access to CMS’s confidential deliberations about upcoming reimbursement decisions.” In addition, Worrall was a project manager on the confidential CMS database, which “contained CMS’s most up-to-date claims data that CMS used to inform its decision-making.” As an “employee of the executive branch of the United States Government,” the DOJ said that, in addition to being prohibited from sharing CMS’s confidential information with people outside of CMS, “WORRALL was subject to Section 21A(h) of the Securities Exchange Act…, which provides, in relevant part, that ‘each executive branch employee…owes a duty arising from a relationship of trust and confidence to the United States Government and the citizens of the United States with respect to material, nonpublic information derived from such person’s position.’”
In their respective press releases, SEC and DOJ officials emphasized the fact that the insider trading scheme involved tips from a federal government employee. Stephanie Avakian, acting director of the SEC Enforcement Division, said that “a federal employee breached his duty to protect confidential information by tipping a political consultant who then passed along those illegal tips…There’s no place on Wall Street or in our government for such blatant misuse of highly confidential information.” Acting U.S. Attorney for the Southern District of New York Joon H. Kim said that “[j]ust like trading on material nonpublic corporate information can be a federal crime, so can trading based on secret government information, as alleged to have happened here. We remain as committed and vigilant as ever in protecting the integrity of the securities markets and our government institutions.” Added FBI Assistant Director-in-Charge William F. Sweeney Jr., “Employees, especially government employees, who have access to this [confidential] information should honor this code of ethics at all times; not just because it’s the right thing to do, but because it’s the lawful thing to do.”
Prohibited trading by former SEC employee: On May 9, 2017, the DOJ announced that former SEC employee David Humphrey had pled guilty in U.S. District Court, District of Columbia to “making false statements in government filings [i.e., annual Office of Government Ethics Confidential Financial Disclosure Reports (Form 450s) and internal SEC certifications of holdings] in order to conceal his prohibited trading of options and other securities.”
According to the facts in the plea agreement, Humphrey worked for 16 years for the SEC in Washington, D.C., serving as the branch chief in the Division of Corporation Finance from 2004 through 2014. The DOJ said that during that time, SEC employee ethics regulations were in place that prohibited Humphrey from purchasing, holding or trading options in securities of companies that the SEC directly regulates, such as financial institutions. Under the regulations, Humphrey was required to “pre-clear securities transactions, make certifications that his holdings were in compliance with these regulations, and annually file Form 450s to disclose assets held for investments with a value greater than $1,000 or that produced more than $200 in income at the end of the reporting period.”
The DOJ said that, despite being fully aware of these regulations and disclosure requirements, Humphrey admitted to “devising and executing” an “options trading strategy” under which he “traded options over 100 times from his SEC computer at various times between 2001 and 2014.” Humphrey further admitted that, during this time, he “signed and submitted multiple Form 450s that failed to disclose reportable assets, including prohibited options.” Finally, Humphrey admitted that, in 2013 and 2014, he “falsely certified that he was in compliance with all applicable SEC regulations relating to prohibited holdings, when in fact Humphrey had traded options in violation of those regulations.”
Humphrey is scheduled to be sentenced on August 8, 2017.