June 26, 2018

Political Intelligence Prosecution

Holland & Knight Political Law Blog
Christopher DeLacy

Last month, a Washington consultant providing political intelligence was convicted of stealing secrets from the government and using it for insider trading. The consultant, who had worked at several Washington, D.C. based firms, was charged with obtaining from an employee of the Centers for Medicare and Medicaid Services (CMS) confidential and nonpublic information he then sold to hedge fund portfolio managers who used it make or recommend profitable stock trades in advance of the information's public release. The information related to reductions in CMS's reimbursement rates for kidney dialysis services, a certain type of cancer treatment and home health care services.

Following a four-week trial, a Manhattan jury convicted the defendant of participating in a scheme to commit securities fraud, wire fraud and misappropriate property belonging to the United States. He had worked at CMS prior to entering the private sector and had maintained a close relationship with the CMS employee from whom he received the information. That individual was also found guilty.

The consultant will be sentenced in September.

This case highlights the risks of some well-established practices within Washington's political and lobbying communities, where there is frequent movement between Hill or agency staffs and K Street, rumors and leaks are not uncommon, and intelligence gathering is routine. While the use of political intelligence to benefit clients typically presents no issues, using such material nonpublic information to make profitable stock trades is another story. This prosecution is an example of the Justice Department's willingness to vigorously enforce insider trading laws in the context of political intelligence as it would in any other. In a statement released by the U.S. Attorney's Office for the Southern District of New York, Deputy U.S. Attorney Robert Khuzami said, "Trading on confidential nonpublic government information is just as illegal as trading on corporate insider information. Our Office is committed to policing and prosecuting both."

Although political intelligence activities are currently not regulated under the Lobbying Disclosure Act (LDA), the collection of non-public information derived from Congress and federal agencies should be undertaken only after implementing a compliance program that takes into account the LDA, the Stock Act, and insider trading laws.

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