Probe of How U.S. Agency's Medicare Move Reached Investors Hits Wall
Incident Has Put Spotlight on Political-Intelligence Business in Washington
WASHINGTON—Investigators are hitting a wall in an insider-trading probe of how a government funding decision made its way to investors before it was officially released, according to people familiar with the probe.
The Securities and Exchange Commission and Federal Bureau of Investigation have been examining whether anyone in government illegally passed along information April 1 about a pending decision on Medicare payments, according to officials involved in the probe.
A report from a Washington policy-research firm, Height Securities, correctly called the decision just before it was announced, which sent health-care stocks soaring.
The incident has put the spotlight on the burgeoning business known as political intelligence, where lobbyists, policy experts and former government officials gather insights on policy changes that they then sell to investors.
But investigators are struggling over how to distinguish between illegal insider tips and accurate predictions based on research and analysis, the people familiar with the probe say.
The legal quandary cuts to the heart of a debate about how business is conducted in the nation's capital, specifically whether the government's common practice of widely sharing information about policies could lead to violations of insider-trading laws.
The investigation involving Height and others connected to the incident continues and still could result in enforcement action, according to people close to the matter. Officials at Height have denied any wrongdoing.
Beyond the health-care investigation, the SEC, FBI and the Justice Department are looking broadly into the political-intelligence business, according to officials involved in the probes.
It is difficult to determine whether a member of Congress or an aide is breaking the law by passing along information, or if the information is something they normally would share in the course of their duties, people familiar with the matter say. It is easier to prove wrongdoing in the executive branch, because agencies often have clear rules about discussing policy.
George Canellos, co-chief of the SEC's enforcement division, speaking at the Benjamin Cardozo School of Law in New York earlier this month, said determining whether anyone in Congress violated a duty to keep information confidential "is probably the toughest and most challenging issue and varies very much on facts and circumstances." He was talking broadly about political intelligence and not about any specific probe.
Unlike traditional insider-trading cases involving information from a publicly held company, when it comes to market-moving information coming from Congress "the lines aren't quite as bright and the opportunities for arguments by the defense are greater," Mr. Canellos said.
The most prominent political-intelligence investigation, involving the Centers for Medicare and Medicaid Services' decision on payments, was prompted by an article in The Wall Street Journal about an alert from Height Securities to its clients that sent shares of health-insurance stocks up as much as 6% in the final minutes of trading April 1.
In that case, Height emailed traders at 3:42 p.m. Eastern time that the Medicare regulator planned to announce it had reversed course on a proposal, a switch that would benefit firms such as UnitedHealth Group Inc. UNH +0.52% and Humana Inc. HUM +1.66%
The alert was based on an email from a health-care lobbyist on retainer by Height. That lobbyist, former Senate Republican aide Mark Hayes, said in the email that he learned about the change from "very credible sources." Mr. Hayes later told congressional investigators that he didn't receive a tip from a lone individual but based his prediction from information gathered partly from conversations with a Senate aide.
Investigators from the FBI, SEC, Department of Health and Human Services and the Senate itself have spoken with officials at Height, health-insurance companies and the Senate, and have determined that dozens of officials at the CMS knew about the decision before it was made public, according to officials involved in the investigations.
That has made it difficult to determine whether Mr. Hayes received an illegal tip or whether he based his conclusion on his own analysis and publicly available information.
Congress passed the Stock Act in 2012 with much fanfare and a promise that it would tighten up insider-trading rules for lawmakers and their aides. The Height case is showing the law's limitations, several law-enforcement officials said.
Rep. Louise Slaughter (D., N.Y.), an author of the Stock Act, wants to go further and enact regulations for political-intelligence operatives similar to those faced by lobbyists.
"Until we enact reforms, the political intelligence industry will continue to game the market and disadvantage ordinary investors by trading on information gleaned from Congress without any scrutiny," she said.
In his remarks at Cardozo, Mr. Canellos said the Stock Act made it marginally easier for the SEC to bring an insider-trading case against someone on Capitol Hill because the law imposed a legal "duty" on congressional officials not to trade stocks on information learned during their official duties. But he said it would be difficult to prove that a congressional official was violating the law by knowingly passing along nonpublic information and not engaging in routine conversations with lobbyists and other interested parties about legislation and strategy.
The Constitution's "speech or debate" clause specifically protects lawmakers and their aides from prosecution for engaging in what it terms legislative conduct. In practice, that means federal agents eyeing those who work in Congress must often negotiate with the legislative branch over the terms and scope of their investigation.
In a memo to staff after the Stock Act was enacted, the Senate Ethics Committee said that the law isn't intended to "chill legitimate communications made in good faith between public officials and their constituents, inhibit government transparency, or otherwise hinder the dissemination of public information about government activities."