Leaky-Washington Defense Set for Fund Consultant on Trial

(Bloomberg) -- A Washington consultant charged with passing government information to hedge funds was part of a Washington culture where leaks and sharing information are the norm, his lawyer said at the start of an insider-trading trial.

David Blaszczak, a former government health agency official, is accused of peddling private of government health-spending policy changes while working as a consultant to hedge funds. His attorney, David Patton, told jurors that employees of the Centers for Medicare & Medicaid Services routinely discuss such information with outside groups and that there was nothing illegal about Blaszczak sharing it.

"If New York is the city that never sleeps, D.C. is the town that never shuts up," Patton said in Manhattan federal court on Monday.

The trial offers a rare look at Washington’s “political intelligence” industry. Patton told jurors that CMS administers more than $1 trillion in government health-care spending each year and can’t set reimbursement rates in a vacuum, without communicating with hospital associations, doctors’ groups, patient advocates, drug manufacturers and other companies. Whatever confidentiality rules may apply, the reality of Washington politics is much more open, he said.

“CMS was not the CIA,” Patton argued. “Far from it."

Prosecutors claim Blaszczak used information from Christopher Worrall, then a CMS employee, to tip off partners at Deerfield Management, a New York fund that allegedly used the information to make $7 million in trading profits. The information concerned government plans to reduce reimbursement rates for a certain kind of cancer treatment and to increase payments for kidney dialysis.

Assistant U.S. Attorney Joshua Naftalis had his own spin on the Tale-of-Two-Cities theme.

"This is a case about corruption in Washington and greed on Wall Street," Naftalis told the jury. "It’s about how these two worlds intersect."

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Hedge funds and other businesses pay consultants, often former government employees, expecting them to leverage colleagues still in public service to get a heads-up on government actions that could move markets. Blaszczak, Worrall and Deerfield partners Robert Olan and Theodore Huber are on on trial for violating laws against insider trading. All deny wrongdoing.

Naftalis said Olan and Huber, along with a third former Deerfield partner, Jordan Fogel, knew they were trading on government information they weren’t authorized to have. He blamed "the head" of Deerfield, without giving his name, for pushing traders to get "an illegal edge."

"That’s what he demanded and that’s what he rewarded," Naftalis told jurors.

Deerfield agreed to pay $4.6 million in August to settle U.S. Securities and Exchange Commission allegations that it failed to properly supervise its employees. It didn’t admit or deny the regulator’s allegations. A Deerfield representative didn’t have an immediate comment.

In addition to Fogel, who has has pleaded guilty and is expected to testify as a government witness, Naftalis told jurors they will hear from Christopher Plaford, a former portfolio manager at Visium Asset Management. Plaford, who has also admitted his guilt, testified against former Visium executive Stefan Lumiere, who was convicted last year of mismarking bonds.

In the Lumiere trial, Plaford identified Blaszczak as the source of an illegal tip that government was planning to reduce reimbursement rates for home health-care services. The charges against Blaszczak include conspiracy and theft charges tied to the Plaford tip.

The case is U.S. v. Blaszczak, 17-cr-00357, U.S. District Court, Southern District of New York (Manhattan).

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