Four Charged In Scheme To Commit Insider Trading Based On Confidential Government Information

Joon H. Kim, the Acting United States Attorney for the Southern District of New York, William F. Sweeney Jr., the Assistant Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), and Elton Malone, Special Agent in Charge, Special Investigations Branch, U.S. Department of Health and Human Services, Office of Inspector General (“HHS-OIG”), announced today the arrests of DAVID BLASZCZAK, a political intelligence consultant, and CHRISTOPHER WORRALL, a government employee at the Centers for Medicare and Medicaid Services (“CMS”).  THEODORE HUBER and ROBERT OLAN, two partners and analysts at a healthcare-focused hedge fund in New York, New York (“Investment Adviser-A”), were also arrested. 

BLASZCZAK, WORRALL, HUBER, and OLAN were charged with participating in a scheme, from in or about 2012 through in or about 2014, to convert United States property, to defraud the United States, and to commit securities fraud and wire fraud for obtaining material nonpublic information from CMS and using it to execute profitable trades at Investment Adviser-A.  In addition, Mr. Kim announced today the unsealing of charges against JORDAN FOGEL, a former partner and analyst at Investment Adviser-A, who pled guilty and is cooperating with the Government.

As part of the scheme, BLASZCZAK is charged with obtaining confidential and nonpublic information from CMS employees, including his friend, CHRISTOPHER WORRALL, who worked at CMS, and who is charged with breaching his duties as a CMS employee by providing confidential information to BLASZCZAK.  BLASZCZAK then is alleged to have provided this material nonpublic information in advance of market-moving CMS announcements to employees at Investment Adviser-A, including HUBER, OLAN, and FOGEL, who allegedly recommended trades on the basis of the information.  As a result of these trades, Investment Adviser-A reaped more than $3,500,000 in profits.

BLASZCZAK is also charged in a separate scheme for obtaining confidential and nonpublic CMS information about cuts in CMS’s reimbursement rates for home health providers, and for providing that information to Christopher Plaford, a portfolio manager at a different healthcare-focused hedge fund in New York, New York (“Investment Advisor-B”).    Plaford then used BLASZCZAK’s information to execute profitable trades.  Plaford has previously pled guilty to this conduct and is also cooperating with the Government. 

HUBER and OLAN will be presented later today before United States District Magistrate Judge Ronald L. Ellis.  BLASZCZAK will be presented later today in the District of South Carolina.  WORRALL will be presented later today in the District of Maryland.   BLASZCAK, WORRALL, HUBER, OLAN, and FOGEL’s cases are assigned to United States District Judge Denise Cote.

In separate actions, the Securities and Exchange Commission (“SEC”) filed civil charges against BLASZCZAK, WORRALL, HUBER, and FOGEL.

Acting U.S. Attorney Joon H. Kim said:  “The five defendants – three with a hedge fund, one political intelligence consultant, and one government CMS employee – allegedly participated in an insider trading scheme to get highly sensitive and confidential information from CMS and feed it to a hedge fund to make illegal profits. David Blaszczak, the consultant, obtained stolen government information from his former CMS colleague and funneled it to his hedge fund clients Theodore Huber, Robert Olan, and Jordan Fogel. Armed with this highly valuable, secret government information, Huber, Olan, and Fogel made trades that allegedly netted the fund over $3.5 million in illegal profits. Just like trading on material nonpublic corporate information can be a federal crime, so can trading based on secret government information, as alleged to have happened here. We remain as committed and vigilant as ever in protecting the integrity of the securities markets and our government institutions.”

FBI Assistant Director-in-Charge William F. Sweeney Jr. said:  “Inside information should remain harbored with those who are trusted to protect it until such a time it becomes available to the public.  Employees, especially government employees, who have access to this information should honor this code of ethics at all times; not just because it’s the right thing to do, but because it’s the lawful thing to do.  Likewise, when individuals outside an organization receive information they know they shouldn’t have, they too have an obligation not to use this to their personal advantage. As alleged, those charged today didn’t abide by these rules, and they are now called upon to stand up and face the charges for what went down.”

HHS-OIG Special Agent in Charge Elton Malone said:  “HHS-OIG Special Agent in Charge Elton Malone said:  “Profiting based on sensitive, insider information is illegal and taints the image of thousands of hard working federal government employees.  We continue to hold federal government employees accountable and to the highest standards of conduct and integrity.”

According to the allegations in the charging documents unsealed today in Manhattan federal court, including the Indictment charging BLASZCZAK, WORRALL, HUBER, and OLAN,[1] and statements made in court proceedings:

CMS

CMS, a component of the United States Department of Health and Human Services (“HHS”), administers Medicare and Medicaid, among other things.  CMS is also responsible for setting Medicare reimbursement rates for healthcare providers.  CMS spends more than $1 trillion annually and pays approximately one-third of the country’s health expenditures.  Accordingly, CMS rulemaking decisions, including decisions that affect how much the federal government will pay to reimburse medical providers for services rendered, have a substantial, market-moving impact on publicly traded companies that depend on government healthcare spending. 

WORRALL began working at CMS in or about 1999.  Beginning in January 2012, WORRALL worked in the Director’s Office for the Center for Medicare (“CM”), which gave WORRALL broad access to CMS’s confidential deliberations about upcoming reimbursement decisions.  WORRALL also served as a project manager for a confidential CMS database that contained CMS’s most up-to-date claims data that CMS used to inform its decision-making.  As an employee of the executive branch of the United States Government, WORRALL was prohibited from sharing CMS’s confidential information with people outside CMS, and WORRALL was subject to Section 21A(h) of the Securities Exchange Act (added by the STOCK Act), which provides, in relevant part, that “each executive branch employee . . . owes a duty arising from a relationship of trust and confidence to the United States Government and the citizens of the United States with respect to material, nonpublic information derived from such person’s position.” 

David Blaszczak

At all relevant times, BLASZCZAK served as a consultant at a number of Washington, D.C.-based firms that, in exchange for a fee, provided so-called “political intelligence,” which included analysis about how changes in Government reimbursement rates would impact publicly traded healthcare-related companies.  Before becoming a political intelligence consultant, BLASZCZAK worked at CMS, eventually serving as a special assistant to the CMS Administrator.  BLASZCZAK met WORRALL while the two worked at CMS. 

As a former CMS employee, BLASZCZAK was well aware of CMS’s rules governing the dissemination of nonpublic information.  BLASZCZAK also received training on the STOCK Act.         

Investment Adviser-A

At all relevant times, Investment Adviser-A managed multiple hedge funds specializing in healthcare-related investments.  As of 2017, Investment Adviser-A had more than $7 billion in assets under management.  HUBER, OLAN, and FOGEL were partners and analysts at Investment Adviser-A, where their job was to analyze investment decisions and recommend potentially profitable trades for Investment Adviser-A.  Investment Adviser-A’s compliance manual prohibited its employees from committing insider trading.  

The Scheme to Convert and Use Confidential CMS Information

The Scheme

As alleged in the Indictment, from at least in or about 2012 through in or about 2014, BLASZCZAK, WORRALL, HUBER, OLAN, FOGEL, and others participated in a scheme to convert to their own use confidential and material nonpublic information from CMS concerning, among other things, CMS’s internal deliberations regarding coverage and reimbursement decisions.

During this time period, Investment Adviser-A retained BLASZCZAK as a consultant who provided political intelligence related to, among other things, the content, likelihood and timing of CMS reimbursement decisions.  As part of the scheme, HUBER, OLAN, and FOGEL encouraged BLASZCZAK to obtain confidential and material nonpublic information from CMS insiders.  As HUBER, OLAN, and FOGEL knew, these CMS insiders included BLASZCZAK’s former colleagues with whom he had close personal relationships, who were prohibited from disclosing such information to CMS outsiders.

BLASZCZAK obtained material nonpublic information from his close friend and former CMS colleague WORRALL.  Beginning in at least 2012, WORRALL began tipping BLASZCZAK about impending CMS decisions, for at least two reasons.  First, BLASZCZAK and WORRALL were friends since their time working together at CMS.  BLASZCZAK also frequently offered to help WORRALL find lucrative private sector employment opportunities, in exchange for WORRALL giving BLASZCZAK confidential government information.  

BLASZCZAK conveyed the information obtained from WORRAL to HUBER, OLAN, and FOGEL, who – knowing that BLASZCZAK had obtained the information improperly from a CMS insider – used the information to trade.  In exchange for being provided with this inside information, HUBER, OLAN, and FOGEL caused Investment Adviser-A to pay BLASZCZAK more than $263,000 in consulting fees.

July 6, 2012 Proposed Radiation Oncology Rule

For example, in or around May 2012, BLASZCZAK improperly obtained confidential and material nonpublic information about CMS’s planned radiation oncology reimbursement cuts from WORRALL.  BLASZCZAK then provided that information to HUBER, OLAN, and FOGEL, who used the information to cause Investment Adviser-A to make profitable trades in public companies that would be adversely affected by the cuts.  BLASZCZAK continued to provide updates about CMS’s internal radiation oncology deliberations throughout May and June 2012, and Investment Adviser-A continued to trade on the confidential information.  When CMS ultimately announced the cuts in a proposed rule, Investment Adviser-A made approximately $1.85 million in trading profits. 

After these successful trades, Investment Adviser-A discussed whether to pay BLASZCZAK a bonus.  In an email, HUBER wrote, “I think Dave earned his bonus with his work on Rad Onc Q2.  We did pretty well on that and it was really 100% Dave[.]”  OLAN responded, “I agree.”  Investment Adviser-A subsequently paid BLASZCZAK’s firm $47,500, which included a $29,000 discretionary bonus.  That was the highest quarterly bonus Investment Adviser-A paid BLASZCZAK’s firm in 2012.

July 1, 2013, Kidney Dialysis Preliminary Rule

In addition, on or about July 1, 2013, after markets closed, CMS announced in a preliminary rule that it planned to cut the reimbursement rate for various kidney dialysis treatments, services, and drugs (known as the “base rate”) by 12%.  Before this announcement, in around March 2013, WORRALL gave BLASZCZAK two confidential, internal CMS documents related to CMS’s kidney dialysis rule.  One of the documents contained a warning that the slides were “for internal government use only” and that “[u]nauthorized disclosure may result in prosecution to the full extent of the law.” 

On or about June 14, 2013, BLASZCZAK and WORRALL attended a baseball game together.  Four days later, on or about June 18, 2013, BLASZCZAK forwarded FOGEL his kidney dialysis prediction and explained that he was “much higher than others on a cut.”  FOGEL asked, “How high?  4-5%?”  BLASZCZAK replied, “12% total but phased in over 3 years 50/25/25.”  That prediction mirrored CMS’s internal proposal for the proposed kidney dialysis rule, which was confidential.

On or about June 25, 2013, FOGEL checked in with BLASZCZAK on the proposed kidney dialysis rule.  BLASZCZAK reported, “No change in my numbers.  I am pretty confident.”  Minutes later, Investment Adviser-A entered orders to short the stock of a company that would be hurt by such a significant kidney dialysis reimbursement reduction.

After the reimbursement rate of 12% was announced, Investment Adviser-A made more than $865,000 in trading profits.  On or about July 2, 2013, after CMS announced the proposed rule, FOGEL wrote to others at Investment Adviser-A about the kidney dialysis announcement.  FOGEL stated, “Credit to d blazcack [sic] on this one.  Wish we didnt wuss out but will still make a couple million on it.” 

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On May 19, 2017, JORDAN FOGEL, 33, of Sands Point, New York, pled guilty before Magistrate Judge Gabriel W. Gorenstein to six counts: one count of conspiracy to convert United States property, to commit securities fraud, and to defraud the United States; two counts of conversion of property of the United States; two counts of securities fraud; and one count of conspiracy to commit wire fraud.  Count One carries a maximum sentence of five years in prison.  Counts Two and Three each carry a maximum sentence of 10 years in prison.  Counts Four, Five, and Six each carry a maximum sentence of 20 years in prison. 

On June 9, 2016, Christopher Plaford, 38, of Bedford, New York, pled guilty before United States District Judge Ronnie Abrams to seven counts: one count of conspiracy to commit securities fraud and wire fraud; one count of securities fraud; one count of conspiracy to defraud the United States and to convert United States property; one count of conversion of United States property; one count of conspiracy to convert United States property, to commit securities fraud, and to defraud the United States; one count of securities fraud; and one count of conspiracy to commit wire fraud.  Counts One, Three, and Five each carry a maximum sentence of five years in prison.  Counts Two, Six, and Seven each carry a maximum sentence of 20 years in prison.  Count Four carries a maximum sentence of 10 years in prison.  

A chart identifying the charges and the maximum penalties applicable to BLASZCZAK, WORRALL, HUBER, and OLAN is below.

Defendants’ Ages and Residences

The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendants will be determined by the judge.

Mr. Kim praised the work of the FBI and HHS-OIG, and thanked the SEC for its assistance. 

This case is being handled by the Office’s Securities and Commodities Fraud Task Force.  Assistant U.S. Attorneys Damian Williams, Ian McGinley, and Joshua A. Naftalis are in charge of the prosecution.   

The allegations contained in the Indictment are merely accusations, and the defendants are presumed innocent unless and until proven guilty.