A year long investigation into the under the radar information links between Washington and Wall Street has led to insider trading charges aimed at the political intelligence industry and healthcare companies. Manhattan federal prosecutors and federal regulators have charged a DC consultant, a government employee, and three hedge fund executives at Deerfield Management with profiting from confidential information about pending decisions by
the centers from Medicare and Medicaid services. They alleged the scheme generated from three point five to three point nine million dollars in illegal profits. My guests are Eugene Saltist, professor at the Harvard Business School and author of Why They Do It Inside the Mind of the White Collar Criminal, and Robert Hocket, professor at Cornell University Law School. Bob start us off by telling us about the case. Sure, So, on the one hand, it's not a classic insider trading case.
On the other hand, it's also an instance of what appears to be a new trend in inCider trading. So it's classic in the sense that you've got somebody who's an insider or to a particular agency that is going to make decisions that are going to have an effect on the price or the value of certain firms, and thus on the prices of those firms securities. That insider then reveals some of the inside information that he has before it becomes public, in this case about two months
before it becomes public. Those to whom he reveals it, of course trade on the securities in question, because they have an informational advantage relative to other traders out there, and then of course they plott rather nice handsome gains, as you said, between three point five and three point
nine million dollars. That's the center, which is classical. The one sense that in which it represents an instance of a new kind of or a new variant of insider trading is that there seems to be an increasing reliance now on the part of insider traders on consultants who used to be employed by the particular agencies, um, whose decisions they're sort of getting access to in advance. Um. The thought seems to be that using these consult will
sort of insulate the insider traders. As we're finding now it's not actually going to insulate them at all. Um. They're going to be found just as well. They seem just as likely to be discovered uh and uh and uh prosecuted as they would have been if they had used the old fashioned way of simply relying on friends. Eugene, is there a fine line to cross between so called political intelligence and insider trading? Yes, I certainly think there is.
I mean, what you see the individuals in this case doing and very much by many of their emails, looks and kind of feels like research. I mean, they were pretty open about their conversations and trying to understand the dates and the size, the changes in payments, uh, the kinds of things that people and analysts are trying to get to better understand how what's going to happen to
affirm in the future. And so if if these hedge fund analysts actually approached a CEO or an investor relations officer and found this out from an executive, so supposed the CEO said, you know, I'm really worried about the reimbursement rates over the next year. We think medicaid might actually change those. Uh. That would actually be a fair
game under our current system of rules. Um, what could happen is could be a regulate de violation from the standpoint of the firm if it was considered material, but it wouldn't lead to an insider training charge for the individuals that are receiving the information. But we see in this case, the fact that they actually acquired this information via someone in the government actually led to a you know,
a much more serious charge for for everyone involved. Bob, what do you agree to because what struck me here is that the the insider was a former friend and had worked with a consultant and didn't seem to really profit from this. Um. Yeah, it's it's not clear at this point whether the actual the the person who was
still within the agency was profiting or not. We do know, however, that the so called consultants who used to work in the agency and was still quite close friends apparently with Mr Laurel who was still within the agency at the time, UH did profit and um Eugene and I also wonder about if a lot of this is has to do with the emails, and I always wonder why are people still writing these emails because some of the things in the emails um Uh. The consultant bragged about his access
to inside information. He wrote his predictions differed from those of a competitor who doesn't know anyone at CMS. His guesses are just wild, random guesses that obviously doesn't look good with emails, and I think that makes the case, helps make the case that the prosecutors will will ultimately
seek to make in the case. But if one actually thinks about looks at reports, for example, written by south Side analysts, um they they kind of not in that kind of explicit way, but they bragged that yesterday I just had a conference call, I just had a private meeting with the CEO and CFO over the firm, and that helped me better understand what's going to happen. And now you should believe my report more than the other
south Side analysts who you might be reading from. So that I think the type in the language obviously is one that is certainly not going to serve anyone well in this case. But the underlying sentiment that you know you have better knowledge than someone else that's still coming within the market. We're talking about Manhattan federal prosecutors and federal regulators charging a DC consultant, a government employee, and three hedge fund executives at Deerfield Management with profiting from
confidential information about pending decisions. By the Centers for Medicare and Medicaid Services. And we're talking with Robert Hockett, professor at Cornell University Law School, and Eugene Soltists, professor at the Harvard Business School and author of Why They Do It Inside the Mind of the White Color Criminal, Bob what One of the um what charges states is that just like trading on material non public corporate information can be a federal crime, so can trading based on secret
government information as alleged as alleged as happened here. But our prosecutors expanding their focus by going to these consultants, I don't well, I mean, I don't think if they're spending the focus as much as they're just responding to changes in the methodologies that are used by insider traders. Right, So this is sort of an interesting phenomenon, right. It's
it's well known. It's long been established that people who have formerly worked in government become consultants partly because they are able to provide access to personnel, to actual policy makers and decision makers, to those who are interested in the outcomes of these sorts of decisions. What's sort of new is they're providing access to what is indeed material non public information of the kind that it's illegal to trade upon. This seems to be something of new development,
and that's, of course what's happening here. Um, and I think that the government is simply responding to it. Both the SEC and the Justice Department. Are, you know, basically keeping up with the times, so to speak, as new methods of conducting insider trading emerge? Uh so do so does the focus of a particular prosecutor or regulator shift in order to sort of again respond to that change.
Eugene attorneys for Robert Ollen and Theodore huber And said that their clients did nothing wrong and a turn, we have not been able to get in touch or they haven't responded yet to the attorneys for the government employee in the DC consultant. But one of the former Deerfield executives, Jordan Fogel, pleaded guilty on Friday and is cooperating with prosecutors. Um. Does that tell you that it's going to be an uphill battle for the defense. I think there's there's a
lot of evidence. I mean, the SEC complaint is over fifty pages, so they've put together a pretty sensive case, especially with the with the emails, UM, especially some of the more colorful emails. But I think the position, you know, their clients are and they're thinking. I think at the time they view themselves as doing research, and I think this is this murky world in which, you know, acquiring some types of information, uh is acceptable and some types
are not. And actually what is deemed material is itself quite fuzzy. I mean it's defined right now. Is something that a reasonable investor would find useful for more making a more informed training decision. Um. On one hand, you could say that covers basically anything, so there's really nothing you can learn from talking to an executive or someone in the government position. But at the same time, every day there's you know, thousands of these meetings going on
all the time. So people believe they can legitimately acquire some kinds of information. The question is what types of information is actually acceptable and unacceptable. Bob I return again to the inside government employee world. He's charged with sixteen
counts and could face two years in prison. Of course, that's a number that will never be reached, but you know, it's one of those numbers they put out there that seems to be a lot for someone who was you know, friends with the guy, had worked with him, and didn't cash, didn't change hands. Yeah. I think there are a couple of reasons though that that make him a couple of reasons that he looks um I think especially worth going
after to the government. The main one is actually one of those colorful emails mentioned a moment ago, um so when he was first first approached by Mr Mr Blass, who had previously worked with him in the agency and now you know with the consultancy for him. Um. You know this his his friend uh promised him apparently the prospect of making up to two million dollars in revenue by revealing this information. Uh. And Mr Worrell apparently responded by saying, you're like a drunk and then put in
square brackets prostitute. To me, it's hard to resist l O L let's talk. So it's it's just fairly incriminate. Think looking email, it makes his motives looks quite criminal. Uh. And so my guess is that that's really the that's the key here. It doesn't really matter whether he got the money or not. The fact that he was acting on the promise of that kind of money and was knowingly do something doing something that he's prohibited from doing. I think that suffices as far as the regulators and
the prosecutors are concerned. Eugene. Whenever we discuss insider trading, we always ask it is the conduct actually harmful to the market, and if so, how how about this conduct that's good at least my view a little bit more interesting. I mean, we generally here from prosecutors. That's the reason why insider trading is harmful is because it's people are
trading in the market on information others don't have. Um. But there's lots of opportunities in the market for people it hedge funds and other other places to have information that I and others don't have. So that's really why it's harmful. It's it's harmful because it's it's misappropriating information.
It's it's steal information. And so in like a more classical insider trading case in which someone knows about an upcoming acquisition a company it makes and then starts tells their friends and they start buying shares, this runs up the price, potentially making that acquisition no longer feasible. So it actually harms the person, harms the entity or the
firm that actually possesses this information. Now what's interesting here is that it's it's not really the misappropriation of the information, which is essentially government information, isn't necessarily causing i'll say harm to the government. I did my PhD Chicago and
kinds of school of market efficiency. I mean, one can actually argue that the incorporating this information to prices actually making markets more efficient, um in that regard um, and it's not necessarily hurting the person that possesses it, the government. So it's I think it's a little bit different in
that regard um. You know, ultimately we can be concerned about the integrities marketing if everyone is trading on information that acquires through these different sorts, going to have to stop you right there will be discussing this again in the future. I hope both of you will come back. That's Eugene Saltis, professor at the Harvard Business School and Robert Hockett, professor at Cornell University Law School. Coming up. President Trump hires a high powered New York lawyer as
he faces multiple investigations. This is Bloomberg