Yesterday, we featured an important article by Noam Scheiber on how Obama insiders cash out on their connections once they leave the fold. Today, in the Wall Street Journal, we read of the Congressional version in terms of how a tip by a lobbyist (and former Congressional aide) connected to an investment research firm led to a Congressional decision being leaked to investors before it was announced officially.
Understand how this connection game works. One way is that Corporate America tries to influence policy in Congress, with regulators, and with the Administration. Former insiders advise business chieftans and their minions who to approach, whose campaigns to support, how to craft their message, and with lobbying and with regulators, will act as agents, often fronting for industry associations with Orwellian names. Notice only working to influence Congress is considered “lobbying” and requires registering as a lobbyist.
The second sort of information flow is that of pending Congressional and regulatory actions (and Fed thinking) that can move markets. The Journal stresses that the political intelligence industry heretofore hasn’t gotten much attention, but the SEC has launched a probe of the case in question, that of a lobbyist Mark Hayes, who has Humana as a client. Hayes is a former health care aide to Senator Chuck Grassley. He also works for a broker-dealer and investment research firm, Height Securities.
Here is the basic outline of what happened, per the Journal:
…on April 1 Height sent a report to clients 18 minutes before the end of trading that predicted—correctly, it turned out—a government agency would drop planned cuts in funding for insurers that offered Medicare Advantage plans.
The report snagged the attention of big hedge-fund firms that placed profitable trades, according to people familiar with the trading activity. Shares in several health-care companies, including Humana, climbed sharply before the market close and again when trading opened the next day….
Mr. Hayes lobbies for Humana, which pressured the government’s Centers for Medicare & Medicaid Services to drop its planned cuts to certain insurance plans. A Humana spokesman said the company had no advance warning of the decision…
The back-and-forth between Mr. Hayes and Height transpired April 1 after a Height policy analyst, Justin Simon, scrambled to chase rumors of CMS’s decision, emailing an array of contacts around Washington, including an aide to Sen. Orrin Hatch (R., Utah,) the top Republican on the Finance Committee, and a lobbyist for Humana. Neither responded, according to the correspondence reviewed by the Journal.
At 3:12 p.m., Mr. Hayes told Mr. Simon in an email he had “heard from very credible sources” a decision had been made to restore the payments.
“Our intel is that a deal was already hatched,” Mr. Hayes wrote in the email.
As Height scurried to verify the tip with public officials, another Height employee forwarded Mr. Hayes’s email to several congressional aides in at attempt to confirm the information. At 3:42 p.m., Height sent a similarly worded alert to its Wall Street clients. Trading in health-care stocks surged.
Ironically, it is Hayes’ former boss, Chuck Grassley, who has been pushing for curbs on political intelligence, who has opened an investigation. The SEC has also opened a preliminary probe.
It’s also unfortunate, and unlikely not a coincidence, that the partial repeal of the STOCK act was signed into law yesterday. From Roll Call:
President Barack Obama signed a partial repeal of the STOCK Act on Monday, with the White House citing national security concerns in canceling a planned online database of investment information of top congressional staffers and administration employees.
It is also key to notice that the sort of multiple hats that Hayes wears is endemic in Washington. The best single work on power in the US is Janine Wedel’s Shadow Elite: How the World’s New Power Brokers Undermine Democracy, Government, and the Free Market. The book describes how connected insiders with shared ideological visions work through what she calls “flex networks.” She calls the perps “flexians” and describes how they collaborate to direct the policies and conduct of governments and major businesses. And they put their cause and their crowd first, and care little about the outcomes of their actions (one of the examples she describes at length is the Harvard cabal that led and tried to profit handsomely from the liberalization of Russia in the early 1990s.
Unfortunately, it is not clear that either the SEC or Grassley will be able to pin anything on Hayes. Insider trading historically was limited to “insiders,” as in people who had a duty of care to the corporation (officers, managers, executives, and agents they employes like law firms and investment banks). The SEC has successfully expanded the notion of what constitutes insider trading as investors have become much more aggressive about obtaining an information advantage (for instance, firms like Gershon Lerman who try to get corporate employees to moonlight on behalf of their clients. Everyone understands that what the clients want is inside information, even though everyone goes through the forms of pretending that the “information” is arms-length research). Case law does not exist in this area, and it will be interesting to see how far the SEC goes in this situation. Hayes’ emails show that he was upset with Height about the leak, but honestly, what did he expect?
So get out your popcorn. This will make for good theater, and it will at least around the margin lead some of the information-hustlers to be a tad more careful about how they play the game. Sadly, that is often the most we can get out of scandals like this.