Investors Get 'Political Intel' Directly From Congress

By Jia Lynn Yang, Tom Hamburger and Dina ElBoghdady, The Washington Post

07 May 13

n the same morning a congressional staffer told investors in a private call that odds were improving for a government decision that would help medical insurers, trading spiked in a major health-care company.

The private call, arranged by a consulting firm called Capitol Street, took place the morning of March 18. At 11:05 a.m., a certain form of speculative trading in Humana, the health insurer, jumped. That day, there was nearly 10 times as much volume as any day in the previous two weeks.

There is no evidence that the trades were in response to the Capitol Hill phone call with a top aide for Sen. Orrin G. Hatch (R-Utah). But the conference call reveals the extent to which a direct pipeline of valuable political insight exists between Capitol Hill and Wall Street, one that ordinary Americans and investors do not enjoy.

"Political intelligence" firms - companies that sell their analysis of federal actions to investors - have drawn much of the scrutiny from lawmakers and investigators worried about potential insider trading. Last month, federal regulators issued subpoenas to the law firm Greenberg Traurig and an analyst at the brokerage firm Height Securities in connection with another spike in trading that occurred after information was shared about the government's health-care decision.

But it is not just boutique firms and lobbyists offering political intelligence. Congress itself has become a source of sophisticated political analysis for investors, for whom every nugget of exclusive information can translate to millions of dollars in profit.

Ipsita Smolinski, managing director of Capitol Street, said she has asked other Senate staffers to participate in similar calls, though she declined to estimate how many had done so, or how often. She viewed the calls as innocuous.

"I wouldn't expect anyone on a call - any staffer - to say anything they would not say to a researcher, a student, an investor or a reporter," said Smolinski, adding that she routinely records such calls as part of an ongoing "commitment to transparency."

She called it "highly unlikely" that her clients would have moved the market. Smolinski described the participants in the call with Hatch's office as institutional investors, such as pension systems, mutual funds and hedge funds. Of interest was how the Obama administration would set rates paid to health insurers that participate in Medicare. She said the half-hour call took place in the morning but could not confirm the precise time.

Hatch spokeswoman Antonia Ferrier denied that the call had anything to do with the spike in trading or that the staff member revealed confidential information.

"No one working for Senator Hatch had any advance knowledge of this [Medicare] announcement - period," said Ferrier, who argued that the staff member, Stephanie Carlton, actually made the wrong prediction on the call about the administration's action.

According to an audio recording of the call obtained by The Washington Post, Carlton, a longtime health-care policy aide for Hatch, spoke cautiously, offering technical details and often attributing her facts to public information.

At one point, Capitol Street's Smolinski pressed Carlton to be specific with her insight. Smolinski asked her to quantify her "crystal ball" regarding the administration's decision.

"I think I would have moved from, say, if I were assigning probabilities 0 to 100 percent, I would have said 5 to 10 percent likelihood ... a month ago," Carlton said. "I would move it up to maybe 30, 35 percent probability that they change it."

She added that she was "definitely more optimistic," though there remained at least one roadblock.

Based on some different factors, though, if they were ever to change the Medicare policy, "this would be the year to do it," Carlton said.

Carlton left Hatch's staff last week for a job in the private sector, a move that Hatch's office said was a long-standing plan. Attempts to reach her were unsuccessful.

Information in Washington is both highly valuable and extremely fluid. Every day there are lobbyists, congressional staffers and reporters trying to figure out what happened behind some closed-door meeting, which senator is about to switch position on a major piece of legislation and whether a regulator is going to greenlight or block a big merger.

This has given rise to a booming business in researchers claiming to offer political intelligence that could give investors an edge in their trading.

Stan Brand, a Washington lawyer specializing in congressional ethics, said he is hearing increasingly about Hill staffers being called to participate in financial industry and investor briefings like the one hosted by Capitol Street.

"It was not common until very recently," said Brand, former counsel to the House of Representatives who now handles criminal defense and ethics cases involving public officials. "I think the financial meltdown and the ensuing interest in regulation of the markets and how they are impacted by Washington has made this a more recurrent issue."

Ferrier said Hatch was aware that his staff gets requests to do briefings from a wide variety of individuals and organizations, including investors. "What information they share is the same information that Senator Hatch shares in an open and transparent way with his constituents," she said.

From Brand's perspective, virtually no limits on speaking exist for congressional staffers, provided there is no remuneration of gifts provided to the public official. Could a Senate staffer impart insider information and be prosecuted? "I think that would be a tough row to hoe," he said.

Insider-trading laws dictate that information that's "material" and not public has to be treated with the utmost care. The Stock Act, passed last year, makes explicit that members of Congress, their staff members and government officials must treat certain information as confidential.

Yet there is a whole gray area of information - call it analysis - that is not easy to judge. Lobbyists with close ties to former colleagues on the Hill, or congressional staffers themselves, can sometimes offer their best sense of what is happening in Washington, offering to investors a composite of what they are hearing from various sources.

Basing predictions on many little data points, none of which are material, is a permissible practice often referred to as the "mosaic theory" in industry parlance, said John C. Coffee Jr., a professor at Columbia Law School.

"But as a matter of ethical policy, you should have a Caesar's-wife approach," said Coffee, who specializes in securities law and white-collar crime. "Stay above suspicion and do not participate in discussions with investors who are clearly seeking to profit from your information."

A few weeks after the call with Hatch's staffer, the administration announced it would raise rates for insurers participating in Medicare, instead of cutting them as previously proposed.

Investors who purchased the options on March 18 could have made a return of five times on their investment or more, said Laura Robinson, a managing director at Navigant Economics in Washington, an economic and financial consulting firm.

The data on the unusual spike in the trading of certain options on Humana's stock were supplied to The Washington Post by Tradeworx, a quantitative trading firm.

Hatch's office denied that there was any connection.

"To say that a staffer who got it wrong contributed to a spike in the market is like saying that because the sky is blue and a train went through Washington, the reason the train went through Washington is because the sky is blue," Ferrier said. "The fact is correlation isn't causality."