A Securities and Exchange Commission insider trading investigation involving a 2013 alert about Medicare Advantage policy from investment-research firm Height Securities has been expanded to include several hedge funds, according to a report from The Wall Street Journal. Here are five things to know about the investigation.
1. In April 2013, Height Securities sent out an email alert to more than 150 investors predicting that CMS would turn a suggested 2.2 percent cut for Medicare Advantage providers in 2014 into a 3.3 percent pay increase (a decision that followed insurance industry lobbying against the potential reduction). After markets closed less than an hour later, CMS issued a press release confirming the pay cut reversal, according to the report.
2. That chain of events prompted the SEC to investigate whether the alert issued by Height Securities violated securities regulations and whether anyone broke insider trading rules by leaking CMS' decision, according to the report. Investigators haven't determined whether any rules were broken yet and haven't alleged Height Securities did anything wrong. So far, the SEC has uncovered the fact that a CMS official with knowledge of the pay cut reversal spoke to a top congressional healthcare aide, Brian Sutter, before CMS' announcement. Mr. Sutter later spoke to Mark Hayes, a lobbyist employed by the law firm Greenberg Traurig and a former Height Securities employee, who emailed the research firm about CMS' decision. A spokesman for Mr. Sutter has declined to comment, while a lawyer for Mr. Hayes said his client didn't possess any nonpublic information and did nothing wrong, according to the Journal.
3. Mr. Hayes represented Humana as an outside lobbyist at the time of the potential leak. Following the investor alert, Humana saw its stocks rise more than any of its competitors in the health insurance industry. Both Humana and Height Securities cut ties with Greenberg Traurig after the investigation began.
4. The SEC has said it doesn't know if the CMS official actually told Mr. Sutter about the upcoming announcement. In May, the SEC subpoenaed him to obtain records of his communication with the CMS official and Mr. Hayes. Mr. Sutter has refused to cooperate, prompting the SEC to file a federal lawsuit seeking to force him to turn over his records. A federal judge is expected to issue a ruling soon, according to the Journal.
5. The SEC investigators have obtained evidence of communications — including phone calls, emails and instant messages — between several hedge funds and Height Securities after the email alert was sent but before the markets closed. Some of the funds include Point72 Asset Management LP (formerly SAC Capital Advisors), Viking Global Investors, Visium Asset Management and Citadel LLC, according to the Journal. There's nothing unusual or illegal about investors simply talking to Height Securities about the alert before making trades. However, if the information in the alert was illegally obtained and the investors knew or should have known, their actions could have violated insider-trading provisions, according to the report. The SEC hasn't made any allegations about rule violations on the part of the hedge funds at this point.