SEC Brings Securities Fraud Charges Alleging Insider Trading Based on Government Information

The term “white collar crime” encompasses a wide range of offenses involving elements of theft or fraud. The offense of embezzlement, for example, involves outright theft from an employer. Other white collar offenses are more complicated and much more difficult for prosecutors to prove. Federal securities laws do not define a specific offense called “insider trading,” but it is a well-known term in this area of law. Insider trading is a type of securities fraud that involves the use of information that is not available to the public. This is usually “inside information” about a corporation that affects trades in that company’s stock. A recently filed indictment goes in a different direction, alleging the use of nonpublic information from a government agency. United States v. Blaszczak, et al., No. 1:17-cr-00308, indictment (S.D.N.Y., May 24, 2017). The case involves a relatively unknown industry known as “political intelligence,” in which consultants obtain information about government operations for clients.

The Securities Exchange Act of 1934 regulates the trading of securities. Insider trading occurs when a person who has inside access to a corporation with publicly traded stock uses information that is available to them as an insider, and therefore not available to the public, to make a decision about trading that corporation’s stock. This puts all other stockholders and potential stockholders at a disadvantage, and it can affect the market as a whole. If, for example, a corporate insider learns that the corporation is going to be the target of an upcoming government investigation, it might constitute insider trading for that insider to sell all or most of their stock before any public announcement of the investigation. The news is likely to have a negative effect on the stock’s price, but the insider has an unfair advantage because of their access to information.

Rather than corporate inside information, the Blaszczak case involves inside information about a government agency. The field of “political intelligence” is difficult to define. It essentially involves consultants with access to government officials. The consultants are able to obtain useful information about government operations for their clients, who are often hedge funds and other investors. In order to be valuable, the information must not be generally available to the public. In this way, it resembles inside corporate information.

One of the defendants in Blaszczak is a former employee of the Center for Medicare and Medicaid Services (CMS). His “political intelligence consulting” services reportedly involved obtaining inside information from people at CMS, based on his personal relationships with them. According to the government’s charges, a CMS employee tipped off the consultant about upcoming changes to Medicare rate payments, which could affect multiple companies’ stock prices. The consultant relayed this information to two individuals employed by a hedge fund that had retained his services. The consultant, the CMS employee, and the two hedge fund employees are all under indictment.

The government is charging all of the defendants with insider trading under the Securities Exchange Act and the SEC’s Rule 10b-5. 15 U.S.C. § 78j(b), 17 C.F.R. § 240.10b-5. Other charges include wire fraud, 18 U.S.C. § 1343; securities fraud, id. at § 1348; and various conspiracy offenses.

These blog posts are meant to be illustrative only. Unless expressly stated to the contrary herein, these matters are not the result of any legal work of Michael J. Brown, but are used to communicate a particular point of view. Michael J. Brown does not claim credit for any legal work done by any lawyer or law firm either generally or specifically, with respect to the matters contained in this blog.

Board-certified white collar crime lawyer Michael J. Brown has fought for people’s rights in West Texas state and federal courts since 1992. To schedule a confidential consultation with an experienced and skilled advocate for criminal justice, contact us today online or at (432) 687-5157.

More Blog Posts:

Commodities Trader Settles Federal Government’s Insider Trading Allegations, Texas Criminal Lawyer Blog, January 25, 2017

Supreme Court Denies Government’s Petition in Major Insider Trading Case, Texas Criminal Lawyer Blog, February 19, 2016

Nine People Indicted for Alleged Insider Trading, Using Information Allegedly Obtained by Hacking, Texas Criminal Lawyer Blog, October 30, 2015