You don’t see this every day. On Friday, the SEC filed a subpoena enforcement action seeking production of documents from the House Ways and Means Committee and documents and testimony from one of its staff members, Brian Sutter. This is fascinating to me for so many reasons, among them: (1) the potential Constitutional cluster we’re about to witness; (2) the real test this poses for the recently passed STOCK Act’s effectiveness; and (3) another example of Mary Jo White’s severe distaste for those who defy Commission subpoenas. The almost certainly unhappy respondents in this case haven’t yet responded in writing, so the factual details below come from the SEC’s supporting brief. They may not be true.
How we got here
In February 2013 the U.S. Centers for Medicare and Medicaid Services announced an anticipated 2.3% reduction in Medicare Advantage reimbursement rates. In fact, though, the actual rates released 20 minutes after the close of market trading on April 1, 2013, amounted to a 3.5% increase. This was very good for some health insurers, whose stock prices increased dramatically, apparently as a result of this news. The curious part for the SEC was, those stock prices increased in the hour before the news was officially announced.
About 70 minutes before the rate announcement, a lobbyist at Greenberg Traurig emailed an analyst at Height Securities, a broker-dealer, giving notice of the unexpected increase in reimbursement rates. A half hour after that, the analyst released a “flash report” to dozens of clients, including prominent investment funds. The report allegedly read:
We now believe that a deal has been hatched to protect Medicare Advantage rates from the -2.3% rate update in the advanced notice mid-February
We believe that the SGR will be assumed in the trends going forward resulting in roughly a 4% increase in cost trends
This is a drastic change in historical policy . . .
We are supportive of MA related stocks (HUM, HNT) under the circumstance
Five minutes after the Height Securities report was released, the prices and trading volumes of the stocks of the affected health insurers apparently increased dramatically. For example, the price of Humana Inc. stock increased by 7% in the last 15 minutes of trading on April 1.
The SEC staff says it has learned during its investigation that a colleague of the emailing Greenberg Traurig lobbyist spoke a number of times during March 2013 with Sutter, the staff director of the House Ways and Means Committee’s Health Subcommittee. The lobbyist himself also spoke with Sutter at about 3:00 p.m. on April 1, ten minutes before the lobbyist’s email to Height. So . . .
Voluntary Requests and Two Subpoenas
The SEC opened a formal investigation into this matter eight days later, on April 9, 2013. Though the SEC staff had authority to send subpoenas at that point, it didn’t start that way for its respondents on Capitol Hill. Instead, beginning in January 2014, the staff tried to get a voluntary production of documents from the Ways and Means Committee and Sutter, and an informal interview with Sutter. House counsel communicated an unwillingness to produce documents or to make Sutter available for an interview. After several failed attempts to get information voluntarily (again, this is the SEC’s unrebutted take at this point), the Commission staff issued subpoenas on May 6, 2014. The scope of the documents sought appears to be fairly narrowly drawn, and is limited to the two months between February 10, 2013, and April 10, 2013.
The Committee and Sutter have objected to the subpoenas on many grounds. They contend that the subpoenas are overbroad, vague, overly burdensome, and improperly intrude into Mr. Sutter’s privacy. They also argue that the subpoenas’ demands violate the Constitution’s Speech or Debate Clause and the Committee’s sovereign immunity.
I may be overly deferential to the SEC here, but the Commission certainly paints a picture of having moved very cautiously in this case. Even with subpoena authority in place, the staff sought to have documents produced and testimony given voluntarily for many months before sending the subpoenas at issue. The six document requests at issue do not seem overly broad or vague to me, and they are unquestionably limited to two months from last year. Separately, the STOCK Act was passed in 2012 to prohibit Members of Congress and Congressional staff members from illicit securities trading on knowledge gained during the legislative process. If potential violations of that law can’t be investigated and enforced with subpoenas to Congressional staff members, I wonder how the investigations are supposed to happen. Also, remember that the SEC under Mary Jo White has a fairly itchy trigger finger when it comes to subpoena enforcement actions. This Commission is not afraid to go to court to get documents and testimony that have been lawfully demanded, and it’s been successful doing so. I don’t know how the Constitutional questions are going to play out, but they are going to be really interesting. Pass the popcorn.