The Securities and Exchange Commission is gearing up to launch a crackdown on insider trading, but some experts say they are redefining what constitutes the illegal act. The aggressive SEC expansion centers on the concept of “political intelligence,” or the use of non-public information from a government source to drive trade decisions in the markets.
The Marwood Group, a political research firm founded by Ted Kennedy Jr., the son of the late Massachusetts’ senator Ted Kennedy, received notification from the SEC stating that the agency intends to recommend to the full commission that the firm be charged with civil insider trading violations. The SEC charges surround a research report that allegedly divulged “material, non-public information” that was alleged to have been obtained from government sources about a drug company, according to the notification.
SEC Chairwoman Mary Jo White clearly wants to expand insider trading laws to include both non-public information involving companies and non-public information from government sources that have potential to influence market prices.
Marwood has vehemently denied the allegations, but it is no secret that the Kennedy family has a long history to alleged uses of “political intelligence” to even up their odds in various markets.
However, if the full commission votes to bring formal charges against the firm, then not only could it bring an end to era and a family’s legacy, but it would be the first known case where regulators deem so-called political intelligence, or the use of non-public information from a government source, tantamount to illegal insider information.
However, some experts worry that Wall Street traders will worry greatly about how actions in the federal government can move markets. Until now, typical insider trading cases involve non-public information from a publicly-held company, and the charges against The Marwood Group would most certainly open up a new era of regulatory oversight, crushing those who make a living off of the political intelligence market. Wall Street hedge funds and traders have a great need to know — at least, to some extent — the political stability of an industry, sector or company in order to make informed investment decisions with their clients’ money.
“This make no sense,” says Michael McKeon, a spokesman for Marwood Group told FOX Business correspondent Charlie Gasparino. “We are very surprised if you look at the facts, there is no tipper, no materiality and clearly no financial benefit for anyone.”
The question the full committee at the SEC will have to decide is whether officials at the Centers for Medicare and Medicaid Services offered individuals at Marwood inside information regarding a prostate cancer drug developed by the company Dendreon. CMS decides where, when and how much in all annual government spending on healthcare. If, for instance, CMS cut or increased funding, then it would either positively or negatively affect the company’s share price.
Here’s the backstory from Gasparino:
In June 2010, CMS decided to scale back on the coverage it would allot to the Dendreon drug called Provenge, but shares of the company began to tank in the weeks before the official ruling was made, during a time of debate inside the agency about funding levels.
CMS officials walk a fine line between secrecy and providing information about agency actions to the public. Various CMS materials contain telephone numbers of agency officials to discuss actions, and political intelligence firms like Marwood often develop contacts at the agency.
Marwood concedes that it has had contact with an agency analyst about the matter, and the analyst said the reduction in funding “is being looked at” a year before the official announcement in June 2010. Just after the agency’s official announcement, Marwood released a research report to 4,000 clients detailing its conversations about the drug with the CMS analyst, and what it says was additional public information it collected.
Marwood officials tell FOX Business that SEC enforcement officials have told the firm that such a conversation is tantamount to an illegal inside tip from the CMS analyst to Marwood. The SEC, Marwood officials say, contends that that the CMS analyst had a “duty” to keep such information confidential, and that Marwood knew such duty existed. In addition, the CMS analyst and the Marwood executive directly involved in the matter had a long-time friendship. Thus in passing the information, the CMS analyst received a “benefit” from the Marwood executive.
However, it really isn’t at all that simple. Insider trading laws are a loosely connected string of court decisions that reflect even more loosely connected, scant pieces of legislation. For years, both state and federal legislatures have had little incentive to take up such a debate, and it is another question altogether whether the SEC even has the power — or, whether they should even have the power — to expand the definition of insider trading so dramatically.
A spokesman for CMS had no immediate comment.