Marwood Grp Gets Wells Notice in Insider Trading Crackdown on 'Political Intelligence'

By SEC FOXBusiness

Will the SEC expand insider trading to government agency info?

FBN's Charlie Gasparino explains how the SEC is expanding their insider trading laws to cover government agency non-public information.

Federal regulators are poised to take on “political intelligence” as part of their broad crackdown on insider trading practices, a move some legal experts say could vastly expand the current legal definition of what constitutes an illegal trade, the FOX Business Network has learned.

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The Marwood Group, a political research firm founded by Ted Kennedy Jr., the son of the late Massachusetts’ senator Ted Kennedy, has received official notification from the Securities and Exchange Commission that its staff plans to recommend to the full commission that the firm be charged with civil insider trading violations. The charges involve a research report that allegedly divulged material non-public information obtained from government sources about a drug company, people at the firm say.

Marwood has denied any wrongdoing in the matter.

If the full commission votes to bring formal charges against the firm—which provides information to Wall Street traders about how actions in the federal government and its various agencies affect stock prices—it could 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.

The vast majority of insider trading cases involve non-public information from a publicly-held company, and the Marwood case could open up a whole new area of regulatory activity, given the expansion of the political intelligence business and how much Wall Street hedge funds and traders have relied on their expertise to make investment decisions.

“This may well be the first case of tipping” involving a federal agency, said Columbia law school professor John Coffee.

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The Marwood Group received what’s known as a “Wells Notice” from the SEC enforcement staff earlier this week through a telephone call, and people there expect a written notification imminently. Marwood and its attorneys will now face an uphill battle to convince the full commission not to bring charges against the firm, since the commission votes to bring charges on the vast majority of such recommendations handed down by the staff of its enforcement division. An SEC spokesman had no immediate comment.

“This make no sense,” says Michael McKeon, a spokesman for Marwood. “We are very surprised if you look at the facts, there is no tipper, no materiality and clearly no financial benefit for anyone.”

At the center of Marwood’s problems involves whether officials at the Centers for Medicare and Medicaid Services provided inside information about a prostate cancer drug developed by the company Dendreon. The center, which is often referred to by the acronym CMS, controls government health-care spending worth billions of dollars annually. A decision by CMS to scale back on such funding would have an impact on a company’s share price, and would be a valuable piece of information for Wall Street traders.

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 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.

How such circumstances may hold up in court could decide whether the full commission votes to bring formal charges. On one hand, SEC Chairwoman Mary Jo White appears to want to expand the current insider trading laws to include not just non-public information that involves companies, but also non-public information that emanates from government but can still move stocks.

On the other hand, insider trading is a murky legal concept; there is no set law, just a bunch of court rulings and it’s hard to see how the Marwood case fits neatly into these precedents. For example, former McKinsey & Co. Chief Rajat Gupta was sentenced to two years in prison for passing insider information to former Galleon Chief Raj Rajaratnam that Gutpta gleaned as a board member of Goldman Sachs.

Prosecutors argued that the benefit that Gutpta received from Rajaratnam was more than friendship—the two had discussed various business relationships over the years and Gupta was invested in one of Galleon’s hedge funds.

Like Gutpa, Rajaratnam was charged with both civil and criminal insider trading charges and he is serving an 11 year sentence. But SEC officials have indicated to Marwood they don’t yet intend to charge any of the alleged leakers at the CMS.

A spokesman for CMS had no immediate comment.

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