(Bloomberg) -- A wide-ranging U.S. probe into under-the-radar information links between Washington and Wall Street snared three hedge fund executives, a D.C. consultant and a government employee, who are accused of profiting off inside information about changes in health-care regulations.
The prosecution takes aim at the political intelligence industry in Washington, in which consultants -- often former government employees themselves -- nurture ex-colleagues for information about potentially market-moving decisions, and relay that to hedge fund traders and others in exchange for lucrative consulting fees.
That’s what prosecutors in Manhattan accused three partners at Deerfield Management, a Centers for Medicare and Medicaid Services employee and David Blaszczak, a former CMS worker with his own D.C. consulting firm, of doing.
They were all charged with fraud Wednesday, accused of profiting on trades with the help of advance knowledge about pending decisions by CMS to cut coverage for a certain kind of cancer treatment and to increase payments for kidney dialysis.
Deerfield, a $7 billion investment advisory firm focused exclusively on the health-care industry, is one of hundreds of hedge funds that have hired D.C. consultants who have an inside track on CMS reimbursement decisions. Those can mean millions of dollars in gained or lost revenue for companies that make medical devices or provide health-care services.
Deerfield is the second hedge fund with ties to Blaszczak to find itself in the crosshairs of federal prosecutors. Earlier this year, in the trial of a former credit portfolio manager at Visium Asset Management, Blaszczak’s name surfaced in trial testimony as the source of insider information that was used by the firm to shape trading strategy.
According to an indictment handed down Wednesday, from 2012 to 2014 Blaszczak used his close personal relationships with former colleagues at CMS to get advance knowledge of pending decisions and passed them on to his clients at Deerfield.
One of those contacts was Christopher Worrall, according to the U.S., whom Blaszczak allegedly invited to join his firm in 2014, promising they’d probably make $2 million in revenue by the end of the year.
“You’re like a drunk whore to me,” Worrall responded, according to the indictment. “Hard to resist. Lol. Let’s talk.”
Also charged in the case are: Jordan Fogel, 33, Theodore Huber, 55, and Robert Olan, who were listed as principals in Deerfield.
“Ted Huber did absolutely nothing wrong,” his attorney Barry Berke said in a statement. “This prosecution is an ill-advised attempt to transform entirely innocent research and trading into a crime.”
Fogel’s lawyer, Marc Mukasey, didn’t immediately respond to a request for comment. Neither did Frank Razzano, a lawyer for Blaszczak. Dentons, a law firm representing Worrall, declined to comment.
Huber and Olan are now on leave from the firm, according to a person familiar with the matter. Fogel left last year. Deerfield is cooperating with the government’s investigation, a spokesman said in an emailed statement.
One of the CMS decisions involved a July 2012 move to reduce reimbursable treatment times for a kind of cancer therapy. Two months before the change was announced, Blaszczak allegedly learned about it from a CMS insider, and tipped off Huber and Olan. The firm then sold short millions of shares in three companies and made more than $1.8 million after the stocks fell on the policy announcement.
In exchange for the information, Blaszczak’s firms received payments from the hedge fund, including $47,500 in the aftermath of the oncology decision -- which included a $29,000 "discretionary bonus," according to the indictment.
After working at CMS until 2005, Blaszczak’s bounced around multiple consulting firms before co-founding Precipio Health Strategies in September 2014. He transferred his business with Deerfield, which he considered to be his most important client, to his new firm. The relationship was mutual. Fogel told his colleagues that Blaszczak was “an outlier on the street” saying his information was “way more valuable than the other dc clowns put together.”
Blaszczak boasted about the quality of his information, telling Fogel in an email that his predictions differed from those of a competitor, who “doesn’t know anyone at CMS. His guesses are just wild random guesses.” He allegedly gleaned that information from his friend, Worrall. The two worked together at CMS and frequently met for lunch, golf, and baseball games.