Four persons were criminally charged in a federal court in New York City for participating in a scheme to obtain confidential proprietary information from a federal agency and to trade on it for profit from at least 2012 through 2014. The four persons and their alleged jobs during the relevant time were: David Blaszczak, a health insurance consultant; Christopher Worrall, a senior staff manager in the Centers for Medicare and Medicaid Services (CMS), part of the US Department of Health and Human Services; and Theodore Huber and Robert Olan, partners and analysts at Deerfield Capital Management. Criminal charges were also filed against Jordan Fogel, a former Deerfield partner and analyst who pled guilty and is helping the government. Civil charges were similarly filed against Messrs. Blaszczak, Worrall, Huber and Fogel in the same federal court by the Securities and Exchange Commission related to the same essential alleged facts. According to an Indictment filed by the US Attorney’s Office in NYC and the SEC’s complaint, Mr. Blaszczak a former CMS employee, allegedly obtained confidential proprietary information from his former colleague and friend, Mr. Worrall, regarding pending announcements from CMS that would impact the price of various health care issuers’ securities. He purportedly passed this specific information on to the three named Deerfield partners and analysts who used it to fashion trades for Deerfield-managed hedge funds. These funds, allegedly generated over US $3.5 million in trading profits as a result of this information. The criminal complaint charged that Mr. Blaszczak induced Mr. Worrall to provide him proprietary confidential government information in reliance on their friendship and promises to help Mr. Worrall gain private sector employment after leaving the government. The US Attorney’s Office seeks prison time against all defendants, while the SEC seeks disgorgement and fines, among other penalties.
My View: Just a few weeks ago, David Humphrey, a former branch chief in the SEC’s Division of Corporate Finance, pleaded guilty to criminal charges of making false statements in government filings in order to conceal his unauthorized trading of options and securities at various times while employed by the SEC from 1998 through 2014. On the same day, Mr. Humphrey also agreed to settle civil charges brought by the SEC related to the same matter. He consented to pay the SEC a fine of US $51,917 and disgorge profits of the same amount plus interest.
Under Regulation Automated Trading as initially proposed, the Commodity Futures Trading Commission would have been permitted to obtain proprietary source code of so-called “AT Persons” pursuant to its general inspection authority. Subsequently, the CFTC modified its proposal to limit such access to requests made pursuant to enhanced special call procedures, but did not restrict such access to requests through subpoena only.
The current pending criminal and civil action against Mr. Worrall, and the recent criminal prosecution and civil action against Mr. Humphrey, evidences one of the many potential concerns of critics fearful of turning over proprietary source code to staff of the CFTC or Department of Justice other than pursuant to lawful subpoena.
Although Mr. Worrall’s and Mr. Humphrey’s alleged wrongful conduct likely represents only the rarest of potential behavior by otherwise ordinarily and overwhelmingly very honest and ethical government employees, it illustrates how, over a relatively long period of time, a rogue government employee could disregard important safeguards to routinely and flagrantly engage in illicit activity right under the nose of his/her employer – including potentially misappropriating confidential information such as source code provided by a private entity.
Only in connection with the issuance of a lawful subpoena can a private entity have an effective opportunity to address in federal court concerns about confidentiality and attempt to tailor government access to proprietary source code subject to reasonable conditions.
(Click here for additional information regarding the criminal and civil charges against Mr. Humphrey in the article, “Ex-SEC Employee Pleads Guilty to Lying About Trading Securities” in the May 14, 2017 edition of Bridging the Week.)