(Bloomberg) -- A jury’s verdict sent a warning to Washington’s political intelligence industry and funds that rely on it: Trading on government secrets is as risky as using insider corporate information.
David Blaszczak, a Washington consultant who gave hedge funds advance word on Medicare reimbursement rates, was convicted Thursday of stealing secrets from the government and insider trading. A federal jury found that he provided hedge fund clients with tips he learned from ex-colleagues still in the government.
Blaszczak, who worked as a consultant after leaving the Centers for Medicare and Medicaid Services, was among four defendants found guilty in Manhattan federal court. Christopher Worrall, Blaszczak’s friend and alleged source inside CMS, was also convicted, as were Robert Olan and Theodore Huber, two partners at Deerfield Management.
The trial cast a harsh light on Washington’s political intelligence industry. While the defense argued that information sharing was routine in the capital, prosecutors took aim at a political culture in which businesses pay consultants, often former government employees, to leverage colleagues still in public service to get a heads-up on planned actions that could move markets.
After a monthlong trial, Blaszczak was found guilty of passing details of government plans to cut reimbursement rates for a certain kind of cancer treatment and for kidney dialysis. Deerfield, which paid Blaszczak about $1 million in fees, used the information to make more than $3.5 million in trading profits, according to prosecutors.
Blaszczak was found guilty of 10 of 18 counts. Defense lawyers declined to comment on the verdict.
The government’s star witness, Jordan Fogel, a former Deerfield partner who pleaded guilty in a bid for leniency, testified that Deerfield used Blaszczak to gain an illegal “edge,” allowing it to trade ahead of government announcements.
Fogel told jurors that Blaszczak passed along frequent updates as CMS considered the reimbursement changes, information that was often at odds with public expectations.
“It was not public,” Fogel testified. “It was much different than the consensus.”
The jury convicted Deerfield partners Olan and Huber of five counts and acquitted them of five others. A spokesman for Deerfield declined to comment on the verdict.
Deerfield, which manages about $8 billion, with investments in more than 100 health-care companies, was under scrutiny throughout the case. Prosecutors said others there knew that Blaszczak was passing illegal tips, including James E. Flynn, a managing partner who allegedly encouraged the practice. Flynn, who wasn’t charged, was identified as a “co-conspirator” before trial, allowing prosecutors to introduce statements he made in evidence. Flynn testified for the defense.
The firm 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 allegations.
Blaszczak’s lawyers claimed his success in predicting CMS actions was the result of exhaustive research based on publicly available information, not tips from a government mole. Defense lawyers called Fogel a liar and questioned why Worrall, who received no money for the alleged tips, would risk his career for nothing.
Defense lawyers also sought to convince jurors that Washington’s information ecosystem operates differently than Wall Street’s, with rumors flowing freely and former staffers hired into K Street lobbying shops for their connections and expertise.
Prosecutors showed the jury evidence of Blaszczak’s cozy relationship with Worrall, which included lunch meetings, golf, baseball games and drinks. Prosecutors claim he wooed Worrall by inviting him to join his firm in 2014, saying they’d probably make $2 million in revenue by year’s end, according to court records.
“We’d kill it working togethe[r],” Blaszczak wrote in a text message to Worrall. “You’re like a drunk whore to me,” Worrall replied. “Hard to resist.”
Ultimately, Worrall didn’t join Blaszczak’s firm, but used such job offers to leverage a promotion at CMS, according to the government.
Worrall was acquitted of 14 counts. He was convicted of one count of theft of government property and one count of wire fraud.
Deerfield is the second fund with ties to Blaszczak to find itself under U.S. scrutiny. Last year, in the trial of a former credit portfolio manager at Visium Asset Management, Blaszczak’s name surfaced as the source of insider tips that were used by that firm to shape strategy.
Blaszczak was also convicted Thursday of passing inside information to Christopher Plaford, a former Visium portfolio manager, in a transaction that didn’t involve any of the other three trial defendants. Plaford pleaded guilty and testified last year in the trial of former Visium executive Stefan Lumiere, who was convicted of mismarking bonds. Plaford also testified as a prosecution witness against Blaszczak.
The case is U.S. v. Blaszczak, 17-cr-00357, U.S. District Court, Southern District of New York (Manhattan).
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