WEBVTT - Deerfield Partners Charged with Insider Trading (Audio)

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<v Speaker 1>A year long investigation into the under the radar information

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<v Speaker 1>links between Washington and Wall Street has led to insider

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<v Speaker 1>trading charges aimed at the political intelligence industry and healthcare companies.

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<v Speaker 1>Manhattan federal prosecutors and federal regulators have charged a DC consultant,

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<v Speaker 1>a government employee, and three hedge fund executives at Deerfield

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<v Speaker 1>Management with profiting from confidential information about pending decisions by

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<v Speaker 1>the centers from Medicare and Medicaid services. They alleged the

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<v Speaker 1>scheme generated from three point five to three point nine

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<v Speaker 1>million dollars in illegal profits. My guests are Eugene Saltist,

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<v Speaker 1>professor at the Harvard Business School and author of Why

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<v Speaker 1>They Do It Inside the Mind of the White Collar Criminal,

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<v Speaker 1>and Robert Hocket, professor at Cornell University Law School. Bob

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<v Speaker 1>start us off by telling us about the case. Sure, So,

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<v Speaker 1>on the one hand, it's not a classic insider trading case.

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<v Speaker 1>On the other hand, it's also an instance of what

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<v Speaker 1>appears to be a new trend in inCider trading. So

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<v Speaker 1>it's classic in the sense that you've got somebody who's

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<v Speaker 1>an insider or to a particular agency that is going

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<v Speaker 1>to make decisions that are going to have an effect

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<v Speaker 1>on the price or the value of certain firms, and

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<v Speaker 1>thus on the prices of those firms securities. That insider

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<v Speaker 1>then reveals some of the inside information that he has

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<v Speaker 1>before it becomes public, in this case about two months

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<v Speaker 1>before it becomes public. Those to whom he reveals it,

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<v Speaker 1>of course trade on the securities in question, because they

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<v Speaker 1>have an informational advantage relative to other traders out there,

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<v Speaker 1>and then of course they plott rather nice handsome gains,

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<v Speaker 1>as you said, between three point five and three point

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<v Speaker 1>nine million dollars. That's the center, which is classical. The

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<v Speaker 1>one sense that in which it represents an instance of

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<v Speaker 1>a new kind of or a new variant of insider

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<v Speaker 1>trading is that there seems to be an increasing reliance

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<v Speaker 1>now on the part of insider traders on consultants who

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<v Speaker 1>used to be employed by the particular agencies, um, whose

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<v Speaker 1>decisions they're sort of getting access to in advance. Um.

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<v Speaker 1>The thought seems to be that using these consult will

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<v Speaker 1>sort of insulate the insider traders. As we're finding now

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<v Speaker 1>it's not actually going to insulate them at all. Um.

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<v Speaker 1>They're going to be found just as well. They seem

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<v Speaker 1>just as likely to be discovered uh and uh and

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<v Speaker 1>uh prosecuted as they would have been if they had

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<v Speaker 1>used the old fashioned way of simply relying on friends. Eugene,

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<v Speaker 1>is there a fine line to cross between so called

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<v Speaker 1>political intelligence and insider trading? Yes, I certainly think there is.

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<v Speaker 1>I mean, what you see the individuals in this case

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<v Speaker 1>doing and very much by many of their emails, looks

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<v Speaker 1>and kind of feels like research. I mean, they were

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<v Speaker 1>pretty open about their conversations and trying to understand the

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<v Speaker 1>dates and the size, the changes in payments, uh, the

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<v Speaker 1>kinds of things that people and analysts are trying to

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<v Speaker 1>get to better understand how what's going to happen to

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<v Speaker 1>affirm in the future. And so if if these hedge

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<v Speaker 1>fund analysts actually approached a CEO or an investor relations

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<v Speaker 1>officer and found this out from an executive, so supposed

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<v Speaker 1>the CEO said, you know, I'm really worried about the

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<v Speaker 1>reimbursement rates over the next year. We think medicaid might

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<v Speaker 1>actually change those. Uh. That would actually be a fair

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<v Speaker 1>game under our current system of rules. Um, what could

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<v Speaker 1>happen is could be a regulate de violation from the

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<v Speaker 1>standpoint of the firm if it was considered material, but

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<v Speaker 1>it wouldn't lead to an insider training charge for the

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<v Speaker 1>individuals that are receiving the information. But we see in

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<v Speaker 1>this case, the fact that they actually acquired this information

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<v Speaker 1>via someone in the government actually led to a you know,

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<v Speaker 1>a much more serious charge for for everyone involved. Bob,

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<v Speaker 1>what do you agree to because what struck me here

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<v Speaker 1>is that the the insider was a former friend and

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<v Speaker 1>had worked with a consultant and didn't seem to really

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<v Speaker 1>profit from this. Um. Yeah, it's it's not clear at

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<v Speaker 1>this point whether the actual the the person who was

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<v Speaker 1>still within the agency was profiting or not. We do know, however,

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<v Speaker 1>that the so called consultants who used to work in

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<v Speaker 1>the agency and was still quite close friends apparently with

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<v Speaker 1>Mr Laurel who was still within the agency at the time,

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<v Speaker 1>UH did profit and um Eugene and I also wonder

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<v Speaker 1>about if a lot of this is has to do

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<v Speaker 1>with the emails, and I always wonder why are people

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<v Speaker 1>still writing these emails because some of the things in

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<v Speaker 1>the emails um Uh. The consultant bragged about his access

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<v Speaker 1>to inside information. He wrote his predictions differed from those

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<v Speaker 1>of a competitor who doesn't know anyone at CMS. His

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<v Speaker 1>guesses are just wild, random guesses that obviously doesn't look

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<v Speaker 1>good with emails, and I think that makes the case,

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<v Speaker 1>helps make the case that the prosecutors will will ultimately

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<v Speaker 1>seek to make in the case. But if one actually

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<v Speaker 1>thinks about looks at reports, for example, written by south

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<v Speaker 1>Side analysts, um they they kind of not in that

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<v Speaker 1>kind of explicit way, but they bragged that yesterday I

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<v Speaker 1>just had a conference call, I just had a private

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<v Speaker 1>meeting with the CEO and CFO over the firm, and

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<v Speaker 1>that helped me better understand what's going to happen. And

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<v Speaker 1>now you should believe my report more than the other

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<v Speaker 1>south Side analysts who you might be reading from. So

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<v Speaker 1>that I think the type in the language obviously is

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<v Speaker 1>one that is certainly not going to serve anyone well

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<v Speaker 1>in this case. But the underlying sentiment that you know

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<v Speaker 1>you have better knowledge than someone else that's still coming

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<v Speaker 1>within the market. We're talking about Manhattan federal prosecutors and

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<v Speaker 1>federal regulators charging a DC consultant, a government employee, and

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<v Speaker 1>three hedge fund executives at Deerfield Management with profiting from

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<v Speaker 1>confidential information about pending decisions. By the Centers for Medicare

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<v Speaker 1>and Medicaid Services. And we're talking with Robert Hockett, professor

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<v Speaker 1>at Cornell University Law School, and Eugene Soltists, professor at

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<v Speaker 1>the Harvard Business School and author of Why They Do

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<v Speaker 1>It Inside the Mind of the White Color Criminal, Bob

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<v Speaker 1>what One of the um what charges states is that

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<v Speaker 1>just like trading on material non public corporate information can

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<v Speaker 1>be a federal crime, so can trading based on secret

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<v Speaker 1>government information as alleged as alleged as happened here. But

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<v Speaker 1>our prosecutors expanding their focus by going to these consultants,

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<v Speaker 1>I don't well, I mean, I don't think if they're

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<v Speaker 1>spending the focus as much as they're just responding to

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<v Speaker 1>changes in the methodologies that are used by insider traders. Right,

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<v Speaker 1>So this is sort of an interesting phenomenon, right. It's

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<v Speaker 1>it's well known. It's long been established that people who

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<v Speaker 1>have formerly worked in government become consultants partly because they

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<v Speaker 1>are able to provide access to personnel, to actual policy

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<v Speaker 1>makers and decision makers, to those who are interested in

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<v Speaker 1>the outcomes of these sorts of decisions. What's sort of

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<v Speaker 1>new is they're providing access to what is indeed material

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<v Speaker 1>non public information of the kind that it's illegal to

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<v Speaker 1>trade upon. This seems to be something of new development,

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<v Speaker 1>and that's, of course what's happening here. Um, and I

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<v Speaker 1>think that the government is simply responding to it. Both

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<v Speaker 1>the SEC and the Justice Department. Are, you know, basically

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<v Speaker 1>keeping up with the times, so to speak, as new

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<v Speaker 1>methods of conducting insider trading emerge? Uh so do so

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<v Speaker 1>does the focus of a particular prosecutor or regulator shift

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<v Speaker 1>in order to sort of again respond to that change.

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<v Speaker 1>Eugene attorneys for Robert Ollen and Theodore huber And said

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<v Speaker 1>that their clients did nothing wrong and a turn, we

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<v Speaker 1>have not been able to get in touch or they

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<v Speaker 1>haven't responded yet to the attorneys for the government employee

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<v Speaker 1>in the DC consultant. But one of the former Deerfield executives,

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<v Speaker 1>Jordan Fogel, pleaded guilty on Friday and is cooperating with prosecutors. Um.

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<v Speaker 1>Does that tell you that it's going to be an

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<v Speaker 1>uphill battle for the defense. I think there's there's a

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<v Speaker 1>lot of evidence. I mean, the SEC complaint is over

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<v Speaker 1>fifty pages, so they've put together a pretty sensive case,

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<v Speaker 1>especially with the with the emails, UM, especially some of

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<v Speaker 1>the more colorful emails. But I think the position, you know,

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<v Speaker 1>their clients are and they're thinking. I think at the

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<v Speaker 1>time they view themselves as doing research, and I think

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<v Speaker 1>this is this murky world in which, you know, acquiring

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<v Speaker 1>some types of information, uh is acceptable and some types

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<v Speaker 1>are not. And actually what is deemed material is itself

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<v Speaker 1>quite fuzzy. I mean it's defined right now. Is something

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<v Speaker 1>that a reasonable investor would find useful for more making

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<v Speaker 1>a more informed training decision. Um. On one hand, you

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<v Speaker 1>could say that covers basically anything, so there's really nothing

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<v Speaker 1>you can learn from talking to an executive or someone

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<v Speaker 1>in the government position. But at the same time, every

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<v Speaker 1>day there's you know, thousands of these meetings going on

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<v Speaker 1>all the time. So people believe they can legitimately acquire

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<v Speaker 1>some kinds of information. The question is what types of

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<v Speaker 1>information is actually acceptable and unacceptable. Bob I return again

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<v Speaker 1>to the inside government employee world. He's charged with sixteen

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<v Speaker 1>counts and could face two years in prison. Of course,

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<v Speaker 1>that's a number that will never be reached, but you know,

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<v Speaker 1>it's one of those numbers they put out there that

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<v Speaker 1>seems to be a lot for someone who was you know,

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<v Speaker 1>friends with the guy, had worked with him, and didn't cash,

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<v Speaker 1>didn't change hands. Yeah. I think there are a couple

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<v Speaker 1>of reasons though that that make him a couple of

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<v Speaker 1>reasons that he looks um I think especially worth going

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<v Speaker 1>after to the government. The main one is actually one

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<v Speaker 1>of those colorful emails mentioned a moment ago, um so

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<v Speaker 1>when he was first first approached by Mr Mr Blass,

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<v Speaker 1>who had previously worked with him in the agency and

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<v Speaker 1>now you know with the consultancy for him. Um. You

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<v Speaker 1>know this his his friend uh promised him apparently the

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<v Speaker 1>prospect of making up to two million dollars in revenue

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<v Speaker 1>by revealing this information. Uh. And Mr Worrell apparently responded

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<v Speaker 1>by saying, you're like a drunk and then put in

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<v Speaker 1>square brackets prostitute. To me, it's hard to resist l

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<v Speaker 1>O L let's talk. So it's it's just fairly incriminate.

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<v Speaker 1>Think looking email, it makes his motives looks quite criminal. Uh.

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<v Speaker 1>And so my guess is that that's really the that's

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<v Speaker 1>the key here. It doesn't really matter whether he got

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<v Speaker 1>the money or not. The fact that he was acting

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<v Speaker 1>on the promise of that kind of money and was

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<v Speaker 1>knowingly do something doing something that he's prohibited from doing.

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<v Speaker 1>I think that suffices as far as the regulators and

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<v Speaker 1>the prosecutors are concerned. Eugene. Whenever we discuss insider trading,

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<v Speaker 1>we always ask it is the conduct actually harmful to

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<v Speaker 1>the market, and if so, how how about this conduct

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<v Speaker 1>that's good at least my view a little bit more interesting.

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<v Speaker 1>I mean, we generally here from prosecutors. That's the reason

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<v Speaker 1>why insider trading is harmful is because it's people are

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<v Speaker 1>trading in the market on information others don't have. Um.

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<v Speaker 1>But there's lots of opportunities in the market for people

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<v Speaker 1>it hedge funds and other other places to have information

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<v Speaker 1>that I and others don't have. So that's really why

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<v Speaker 1>it's harmful. It's it's harmful because it's it's misappropriating information.

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<v Speaker 1>It's it's steal information. And so in like a more

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<v Speaker 1>classical insider trading case in which someone knows about an

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<v Speaker 1>upcoming acquisition a company it makes and then starts tells

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<v Speaker 1>their friends and they start buying shares, this runs up

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<v Speaker 1>the price, potentially making that acquisition no longer feasible. So

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<v Speaker 1>it actually harms the person, harms the entity or the

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<v Speaker 1>firm that actually possesses this information. Now what's interesting here

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<v Speaker 1>is that it's it's not really the misappropriation of the information,

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<v Speaker 1>which is essentially government information, isn't necessarily causing i'll say

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<v Speaker 1>harm to the government. I did my PhD Chicago and

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<v Speaker 1>kinds of school of market efficiency. I mean, one can

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<v Speaker 1>actually argue that the incorporating this information to prices actually

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<v Speaker 1>making markets more efficient, um in that regard um, and

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<v Speaker 1>it's not necessarily hurting the person that possesses it, the government.

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<v Speaker 1>So it's I think it's a little bit different in

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<v Speaker 1>that regard um. You know, ultimately we can be concerned

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<v Speaker 1>about the integrities marketing if everyone is trading on information

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<v Speaker 1>that acquires through these different sorts, going to have to

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<v Speaker 1>stop you right there will be discussing this again in

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<v Speaker 1>the future. I hope both of you will come back.

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<v Speaker 1>That's Eugene Saltis, professor at the Harvard Business School and

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<v Speaker 1>Robert Hockett, professor at Cornell University Law School. Coming up.

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<v Speaker 1>President Trump hires a high powered New York lawyer as

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<v Speaker 1>he faces multiple investigations. This is Bloomberg