Publications

The criminal convictions in the David Blaszczak case^[1] on May 3, 2018 highlight the risks of trading on the basis of information obtained from government sources or “political intelligence.” The case is a stark warning that aggressive research can turn into criminal conduct when information is obtained from government personnel who have an obligation to keep it confidential. In this case, the confidential information consisted of internal deliberations and planned actions of a federal agency, the Centers for Medicare and Medicaid (CMS), concerning proposed Medicare reimbursement rates, which affect the revenues of companies in the health care industry. Mr. Blaszczak, a consultant in the “political intelligence” community, was charged with providing the information, which he obtained from a friend at CMS, to partners of an investment advisory firm which retained him. The adviser firm used the information to trade in several health care companies. Mr. Blaszscak, along with the investment adviser partners, was convicted of criminal securities violations. The federal employee who was the original source of the information was found guilty of other criminal violations.

The Securities and Exchange Commission brought a separate proceeding against the advisory firm which had retained Mr. Blasczak and employed the partners who used the information he conveyed, charging the firm with failure to establish and maintain compliance procedures designed to prevent the use of material nonpublic information. Among the findings by the SEC was that the investment firm relied on its own employees to self-evaluate and self-report the potential receipt of material, nonpublic information, but failed to adopt policies and procedures to ensure that its employees did so. The SEC also found that, contrary to the adviser firm’s own policies and procedures, it failed to review the policies and procedures of the research firms it engaged. The firm settled with the SEC and agreed to disgorge investment advisory fees of approximately $714,000 from the alleged improper trades. It also agreed to pay a penalty of approximately $3.9 million, representing the profits earned by the investment funds it managed as a result of the trades.

This case is a reminder that information in the government arena – whether at a government agency, a congressional committee or the executive branch – is not always public information. It is critically important to monitor closely firms that are engaged to gather such political information to assure that only public information is obtained from such sources.

^[1] U.S. v. Blaszczak, 17-cr-00357, U.S. District Court, Southern District of New York.

For more information on the topic discussed, contact:

• Ralph A. Siciliano  |  siciliano@thsh.com  |  212-508-6718