Government Probe of Height Securities Into Possible Insider Trading Expands to Hedge Funds

The U.S. Securities and Exchange Commission is looking into whether anyone from the government illegally leaked to Wall Street traders that there was going to be a change in health-care policy. In 2013, The Wall Street Journal reported that just before the government announced news that was favorable to companies in regards to Medicare payments, health-insurance stocks rose. Investigators want to know whether insider trading was involved.

The stock rise, linked to the announcement that the Centers for Medicare and Medicaid Services would reverse its direction on intended funding cuts for private insurance plans, may have been spurred by an email sent by a Height Securities, a Washington-based policy research firm. The alert appears to have been partially based on information that an ex-congressional health-care aide, who is now lobbyist, gave to the firm.

Sources tell The WSJ that the SEC now possesses evidence of over 20 phone calls, instant messages, and emails between investors and Height Securities analysts from the time the email alert was issued to when the market closed. The exchanges involved the hedge funds Citadel LLC, Visium Asset Management LLC, Viking Global Investors LP, and Point72 Asset Management LP, which was previously called SAC Capital Advisors.

It wouldn’t necessarily have been illegal for investors and Height Securities employees to discuss the note. However, investors could be liable if they knew or should have known the information was obtained illegally—if, in fact, it was obtained illegally—which would violate insider trading rules.

For now, investigators have not said that any alleged wrongdoing occurred. They are, however, trying to find out whether Washington’s habit of issuing tips about policy changes for investors goes against insider trading laws.

The SEC can file civil charges if it can prove that an investor made a trade because of nonpublic, material data that was procured in a manner that violated a duty. Charges can also be brought if an investor acted recklessly in disregarding a “substantial risk” that there might be insider information involved in a trade.

Washington Trading Probe Broadens to Hedge Funds, The Wall Street Journal, September 10, 2014

SEC subpoenas ‘political intelligence’ firms in a case of leaked information, The Washington Post, May 1, 2013

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