What Is The Value of Cooperation With the SEC?

by Dorsey & Whitney LLP
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The Commission has long encouraged firms and individuals to cooperate with its investigations based on the promise of consideration when the action is resolved. When the resolution is reached the agency may acknowledge the cooperation of the individual. In making such an acknowledgement the SEC does not in the usual course identify what actions the person took or identify the “cooperation credit” earned – that is, how did the cooperation impact the charging decision, the resolution of the charges against the person or both. This contrasts sharply with actions resolved by others. For example the Department of Justice when resolving FCPA cases frequently cited examples of what the person or company did to cooperate and then identifies how it impacted the matter. The U.K. Serious Frauds office will specify that the cooperator received a discount on the penalty of a specific percentage as will the Hong Kong Securities and Futures Commission.

The resolution of potential charges against Jordan Fogel, a defendant in the Commission’s most recent political intelligence insider trading case, however, gives a glimpse into the undisclosed world of SEC cooperation credit. SEC v. Blaszczak, Civil Action No. 1:17-cv-03919 (S.D.N.Y. Filed May 24, 2017). Named as defendants in the underlying case were: David Blaszczak, formerly an employee of Medicare & Medicade Services or CMS who has worked for a series of consulting firms since 2005; Christopher Worrall, an employee of CMS since 1999 and long time friend of Mr. Blaszczak; Theodore Huber, a health care analyst for Adviser A; and Mr. Fogel, also a health care analyst for Adviser A.

The action centers on alleged tips of inside information by Mr. Worrall to Mr. Balaszczak about three significant rate changes at CMS between May 2012 and November 2013. CMS issues proposed and final rules that set the Medicare reimbursement rates for the following calendar year. The releases often impact the share price of firms that offer products and services covered by the impacted fee changes. Accordingly, the rate changes are made after the close of the market.

Mr. Worrall had access to material non-public CMS decisions concerning reimbursement amounts. Through his position at CMS Mr. Worrall monitored price changes. That position imposed a duty of confidentiality on Mr. Worrall. As a CMS employee he was subject to Section 21A(h) of the Exchange Act which imposes a duty of trust and confidence on executive branch employees to the U.S. Government and the citizens of the United States with respect to material, non-public information. The Section was added to the Exchange Act by the STOCK Act of 2012. CMS, in addition, has an Employee Nondisclosure Policy that imposed similar duties regarding “market sensitive” information. The Standards of Ethical Conduct for Employees of the Executive Branch fortified those duties.

Despite his obligations, in three instances over a period of about one and one half years, Mr. Worrall furnished inside information on CMS rate changes that lowered reimbursement rates to his friend and former co-worked, Defendant Blaszczak. The information on each occasion was transmitted in personal meetings, on the telephone, in emails and through text messages. In each instance the information was transmitted by Mr. Blaszczak to Mr. Huber and/or Mr. Forel who in turn caused Adviser A to enter into securities transactions on behalf of certain hedge funds. Mr. Worrall knew, or should have known, the information would be used for securities trading. Those transactions yielded over $3.9 million in trading profits.

Mr. Blaszczak knew or should have known that the information he obtained from his long time friend was material, non-public information, according to the complaint. He knew the position of his friend at CMS and the access he had to such information. He also touted his connection to CMS and those with information about the future actions of the agency. Mr. Worrall furnished the information to his former colleague in view of the long-standing friendship of the two men. He was also aware that the relationship furnished him with certain business opportunities such as the prospect of leaving CMS and entering the consulting business. While he had considered potential opportunities he did not, during the period here, accept them. Mr. Worrall did, however, use one job offer he rejected to secure a significant pay increase at CMS.

Defendants Huber and Forell knew, or should have known that the information furnished to them by Mr. Blaszczak traced to CMS. Both men knew that Mr. Blaszczak had once been employed by the agency and that he maintained contacts with the CMS staff. They were also aware that the information he provided differed from that put out by other analysis and proved to be accurate. Indeed, they sought out Mr. Blaszczak to verify information for them.

Each of the men down the tipping chain also benefitted from the illegal trading as did Christopher Worrall. Adviser A paid Mr. Blaszczak’s firm just under $200,000 during the period for the information. Messrs. Huber and Forell are believed to have been compensated for the information resulting in the profitable trades, according to the complaint. That complaint alleges violations of Securities Act Section 17(a)(1) and Exchange Act Section 10(b). The Manhattan U.S. Attorney’s Office brought a parallel criminal case.

Mr. Fogel agreed to cooperate with the SEC in its ongoing litigation. As part of that agreement he consented to the entry of a permanent injunction based on each of the Sections cited in the complaint – Securities Act Section 17(a) and Exchange Act Section 10(b). The Court will determine what amount, if any, of disgorgement and prejudgment interest Mr. Fogel should pay as well as the amount of any civil penalty. See Lit. Rel. No. 23899 (August 8, 2017).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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