(Bloomberg) -- Washington’s "political intelligence" industry was supposed to be the focus of an insider-trading trial under way in Manhattan. But it’s Deerfield Management that’s in the spotlight in the early proceedings.
Former Deerfield trader Jordan Fogel told jurors Thursday how he and others used non-public information they got from a health-care industry consultant to make millions of dollars for the hedge fund. Prosecutors claim the consultant, David Blaszczak, passed information to Deerfield that he got from a friend and ex-colleague at the Centers for Medicare & Medicaid Services.
Blaszczak’s information was more precise than other political-intelligence consultants’, allowing Deerfield to get the necessary “edge” to trade ahead of of public announcements, Fogel said. He told jurors that Blaszczak kept him updated with information about the government’s 2013 plan to cut kidney dialysis payments.
“It was not public,” Fogel testified. “It was much different than the consensus.”
The firm used the information from Blaszczak to take a profitable short position in the shares of Fresenius Medical Care AG, which makes dialysis products, he said.
Fogel pleaded guilty and is cooperating with prosecutors.
New York-based Deerfield manages about $8 billion, with investments in more than 100 health-care companies, according to its website. Prosecutors said Deerfield was Blaszczak’s top client and that the firm paid him about $1 million in fees. Deerfield partners Theodore Huber and Robert Olan are on trial for violating insider-trading laws along with Blaszczak and Christopher Worrall, Blaszczak’s alleged CMS source.
Prosecutors also claim the knowledge that Blaszczak was passing illegal tips extended to others in the firm, including managing partner James E. Flynn, who encouraged the practice to boost profits. Flynn, who isn’t charged, was identified as a “co-conspirator” by a prosecutor in a discussion outside the jury’s presence Thursday, according to a transcript. (The designation allows the government to introduce statements from Flynn into evidence.)
“The head of Deerfield pushed them to get an illegal edge, inside information, that they could use to earn the firm millions of dollars,” Assistant U.S. Attorney Joshua Naftalis said April 2 in opening statements. That’s what he demanded “and that’s what he rewarded,” he said.
Deerfield agreed in August to pay $4.6 million to settle U.S. Securities and Exchange Commission allegations that it failed to properly supervise employees. It didn’t admit or deny the allegations. Flynn wasn’t sued by the government. A Deerfield spokesman didn’t have a comment on the government’s allegations or the designation of Flynn as a co-conspirator. Fogel, 34, is no longer with the firm, and Huber and Olan are on leave.
At one point during Fogel’s testimony, Assistant U.S. Attorney Ian Patrick McGinley asked him what Flynn had said to him about Blaszczak’s "edge."
"That Blaszczak gave us information that gave us a strong edge, and that Blaszczak, as a resource, was one of our stronger pieces of edge" for his team, which focused on the medical device industry, Fogel answered.
In cross-examination that began on Thursday, Barry Berke, a lawyer for Huber, questioned Fogel about his drug use, lies to prosecutors and gambling, and had him testify that Deerfield got information from numerous legitimate sources. Earlier in the trial, lawyers for Huber and Olan said their clients didn’t believe there was anything crooked about the information they got from Blaszczak.
Deerfield, which received a subpoena last year for evidence relating to its dealings with Blaszczak, produced a document, two days before the start of trial, that lends support to the government’s claim that other people believed Blaszczak was getting confidential information from CMS. Prosecutors said the firm blamed a “technical glitch” for failing to turn it over earlier.
The 2007 email titled “Morning Meeting Notes - Anything to add?” was from Alexander Karnal, and appears to discuss more than a dozen deals and stocks. It includes the line: “Blaszczaks comments pre-news suggest he had a read of draft documents.”
Deerfield held morning meetings every workday at 8:30 a.m., where traders and analysts pitched ideas for Flynn to green-light or reject, defense lawyers said. The meetings included Deerfield’s lawyer and compliance officer, the chief financial officer and administrative staff, Olan’s lawyer, David Esseks, told jurors.
Huber and Olan wouldn’t have aired Blaszczak’s information to the entire firm if they thought it wasn’t legal, their lawyers argued.
Prosecutors claims the meetings show the firm knew Blaszczak was getting inside tips.
Fogel testified about emailing Blaszczak in February 2013 to let him know he’d switched from Deerfield’s medical devices team to the one covering health-care services. He said he wanted to “catch up soon and figure out how we can re-ignite the Blaszczak-Fogel money printing machine.”
The case is U.S. v. Blaszczak, 17-cr-00357, U.S. District Court, Southern District of New York (Manhattan).
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