Who Could've Guessed That The 'Political Intelligence' Industry Might Help Hedge Funds Insider Trade?

Alternate question: Who could've known that sometimes hedge funds actually get the advice they pay for?
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Someday, someone will create a very large map of all the information in the world, with various regions color-coded for information that is public and nonpublic, material or immaterial, and combinations thereof. It'd be mostly monochromatic, with islands of Material Nonpublic overlapping with the spots where large corporations lie. But the biggest and most concentrated Material Nonpublic blob would hover over Washington, DC, and the U.S. government.

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It's no wonder, then, that an entire industry has sprung up in Washington to mine that vast store of information and sell it to those who can transform it into profits. The only issue is when the info in question is material enough and nonpublic enough to set off insider trading alarms amongst regulators. This is to be avoided.

Yet sometimes people get carried away. On Wednesday the SEC charged a DC consultant, together with two hedge funders and a government employee, in an insider trading scheme involving health care policy and medical stocks.

David Blaszczak, 41, “worked as a consultant in the so-called ‘political intelligence’ industry,” as the SEC complaint sniffily puts it, scare-quotes and all. Blaszczak often phoned in favors from his buddy Christopher Worrall, a 39 year-old employee of the Centers for Medicare & Medicaid Services, whose position clued him in in advance on crucial government reimbursement changes for billions of dollars in medical spending. Blaszczak stands accused of passing tips from Worrall to clients at health investment fund Deerfield Management, Jordan Fogel and Theodore Huber, the latter of whom apparently still works there.

It's not hard to see how the scheme worked. When Blaszczak wasn't just straight-up visiting the CMS, the SEC says, he picked up information while golfing, lunching, or watching baseball with Worrall. Then he'd call up Huber and Fogel at Deerfield and clue them in on what was coming down the pike, from changes in dialysis procedures to new radiation oncology rules. Deerfield's hedge funds would then do what hedge funds do.

Huber and Fogel, who advised Deerfield's in-house hedge funds what to do, clearly valued Blaszczak's uncommonly precise tips, though not enough to put all the consonants into his surname. “Blazcack [sic] dead on again,” Fogel wrote, allegedly, after a tip of his earned Deerfield about $1 million. “He is the only one who has a clue.” Another time, Fogel wrote that Blaszczak was “an outlier on the street” and that his tips were “[w]ay more valuable than the other dc clowns put together.”

One entertaining aspect in the case is how clearly everyone seems to know what's going on, even those not in on the score. For instance, when Blaszczak leaves one political intelligence firm for another, he gets an update from a former client about the guy who had taken his place:

“The new Dave has been told by Potomac to be very careful with running with detail that is not public knowledge. So for instance when he talks with CMS staff he has to say ‘don’t tell me anything you don’t want made public.’” According to the client, a colleague at the client’s company had responded by advising Blaszczak’s successor, “‘well you are going to suck at your job then.’”

Still, the portrait that emerges from the political intelligence industry isn't all bad. We hear of rivals of Blaszczak's who come close to making the right calls, but miss the mark, presumably because they don't make a habit of joining a current CMS higher-up at Nationals games. About one competitor, Blaszczak allegedly writes, “i can say with 100% confidence he doesn’t know anyone at CMS. His guesses are just wild random guesses. I wouldn’t read into what he says[.]”

The more interesting aspect of the case is how the spoils of political intelligence are divvied up amongst the players. Deerfield made $3.9 million from its eerily accurate trades, mostly shorting stocks in advance of policy announcements that hurt certain companies. Huber and Fogel were compensated for the performance of trades they advised, though the SEC doesn't specify how much.

Meanwhile, Blaszczak's firms raked in a total of $193,000 from Deerfield, the SEC says, which amounts to about 5 percent of the profits Deerfield's hedge funds allegedly made from his tips. Not bad!

As ever, it's the government employee, Worrall, who got hosed. The SEC describes him as taking an active interest in leaving bureaucratic bean-pushing for highly lucrative private-sector work. Blaszczak is quoted offering Worrall a job at his firm someday. Worrall's (alleged) response: “You’re like a drunk whore to me. Hard to resist. Lol. Let’s talk.”

At one point Blaszczak even helped Worrall score a private-sector job offer, the complaint says, which Worrall used to negotiate for a promotion at the CMS. His upside: $10,000. The downside: being caught and fired. Here's a CMS colleague, upon learning that Blaszczak had somehow obtained insider info:

“Where does he get his information from? It is pretty unbelievable and will probably blow up at some point.” He later added, “Don’t know but it is obviously someone with access to our impact papers. I just can’t see the motivation for sharing this information. I would doubt someone is trading based on it as they [sic] would be both a crime and require lying on financial disclosure reports which does not seem worth the risk.”

Of course, Worrall wasn't investing in stocks, according to the SEC, but in friendship (an important consideration in insider trading cases, as it turns out). Worrall “received the benefit of giving valuable, confidential information to a close, long-term friend,” the SEC writes. That appears to be the chief benefit he got from (allegedly) smuggling all that confidential info out of Government-land and into Profitstan.

The SEC does not specify whether Worrall and Blaszczak are still friends.

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