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From Securities Regulation Daily, November 16, 2015

House Committee, former staffer ordered to comply with SEC insider trading investigation

By Kevin Kulling, J.D.

A federal district court in New York has ordered the U.S. House Ways and Means Committee and a former subcommittee staff director to comply with SEC subpoenas that were issued as part of an insider trading investigation involving the disclosure of future Medicare payment rates. The former staff director must also submit to the agency’s request for a deposition (SEC v. Committee on Ways and Means of the U.S. House of Representatives, November 13, 2015, Gardephe, P.).

SEC insider trading investigation. The SEC investigation, launched in 2013, sought to determine whether any person or entity violated the federal securities laws by trading in the securities of Humana, Inc. or other issuers, based on inside information regarding payment rates for medical providers serving Medicare patients.

According to the court’s opinion, on April 1, 2013, at approximately 4:15 p.m., the U.S. Centers for Medicare and Medicaid Services (CMS) issued the 2014 Medicare Advantage rate announcement. The CMS rate announcement informed all Medicare Advantage organizations, prescription drug plan sponsors, and other interested parties of the annual “capitation” rate for the calendar year 2014. The capitation rate is the monthly payment that a provider receives per enrollee to be provided with services under Medicare’s covered benefit package. The CMS rate announcement differed significantly from preliminary rates announced approximately 6 weeks earlier. The final announcement included a change in methodology that resulted in payment rates that were more favorable to insurers than the preliminary payment rates, according to facts set forth in the opinion.

Approximately one hour before the release of the CMS Rate announcement, a lobbyist at Greenberg Traurig, LLP, sent an email to an analyst at Height Securities, LLC, stating that they had “intel” that the final rate notice would include the increased rates, according to the court’s opinion.

Shortly after the lobbyists’ message, but before the public announcement, Height Securities sent a flash report to nearly 200 clients about the final rate announcement. Within five minutes of the release of the flash report, but again before the release of the rate announcement, the price and trading volume of certain health insurers rose dramatically. Humana’s stock appreciated by approximately seven percent within twelve minutes of the flash report, according to the court’s opinion.

House staffer Brian Sutter. Brian Sutter served on the professional staff of the House Ways and Means Committee’s Health Subcommittee, according to the opinion. The SEC represented in court filings that it possessed information indicating that Sutter spoke several times with a colleague of a Greenberg lobbyist who sent the email to the Height Securities Analyst. The SEC sought documents, including emails and phone records, as well as other communications, and requested that Sutter sit for a deposition.

When Sutter and the Committee refused to comply with the subpoenas or to submit to a deposition, the SEC filed an application for an order requiring compliance with its subpoenas.

Rejection of Committee’s arguments. The court rejected the constitutional arguments raised by the Committee and Sutter, and found that the matter did not involve a claim or application brought by a private party, which rendered the doctrine of sovereign immunity inapplicable. “Given that no court has ever held that sovereign immunity applies to an inter-branch subpoena, and given that the House rules appear to acknowledge that no blanket sovereign immunity applies to an administrative subpoena issued by a federal agency to the House, a House member, or House staff, the court concludes that sovereign immunity has no application here.”

Moreover, the court found that sovereign immunity had been waived in light of the adoption of the Stop Trading on Congressional Knowledge Act of 2012 (STOCK Act), which provides that members of Congress and congressional employees are not exempt from the insider trading prohibitions arising under the securities laws.

The court also found that the U.S. Constitution’s Speech or Debate Clause did not prevent the disclosure of the documents. The court said that the clause protects conduct and materials that are within the sphere of legitimate legislative activity, but the clause did not protect the dissemination of information outside of Congress.

Categories of documents to be provided. The court thoroughly reviewed each of the categories of documents sought by the SEC and limited the scope of some of the requested information the court deemed to be overbroad. The court held that Sutter’s statements to members or employees of Greenberg were not protected, and documents relating to, referring to, describing, evidencing, reflecting, or constituting such statements must be produced.

Documents that did not reflect the Committee’s work in gathering information to aid in legislating on the issue of Medicare reimbursement rates were also ordered to be produced, according to the order. In addition, personal phone and email information of Sutter’s were not protected unless the underlying activity was legislative in nature.

The court also found that Sutter, as a staff director of a congressional subcommittee, did not qualify as a “high ranking government official” for purposes of the “exceptional circumstances doctrine,” which, if it applied, could have forced the SEC to demonstrate the existence of exceptional circumstances before proceeding with Sutter’s deposition.

The court gave the respondents ten days to comply with the SEC’s subpoenas, as limited by the court.

The case is No. 14 Misc. 193 (PGG).

Attorneys: Amanda Straub for the SEC. Kerry Kircher, General Counsel, U.S. House of Representatives, for The Committee on Ways And Means of The U.S. House of Representatives and Brian Sutter.

MainStory: TopStory Enforcement FraudManipulation NewYorkNews

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