House Staff Told by Judge to Obey Insider Probe Subpoenas

  • Federal court sides with regulators on insider-trading probe
  • Staff members argued they were immune from such an inquiry

The U.S. House Ways and Means Committee and a former top staff member must obey subpoenas in a Securities and Exchange Commission insider-trading investigation tied to health-care legislation, a federal judge ruled, rejecting their claims of immunity from such an inquiry.

The ruling, which tested the limits of federal insider-trading law, will allow SEC lawyers to question the staff in a probe of allegations that nonpublic information was disclosed about a change in a U.S. health-care policy. The SEC says the change resulted in a spike in health-insurance companies’ shares.

“Members of Congress and Congressional employees are not exempt from the insider trading prohibitions arising under the securities laws,” U.S. District Judge Paul Gardephe in Manhattan wrote in the Nov. 13 ruling. “Congress barred such claims of immunity when it adopted the Stop Trading on Congressional Knowledge Act, commonly known as the STOCK Act, in April 2012,” the judge said.
 
The SEC is investigating the sharp share increases of companies including Humana Inc., ahead of a government announcement in 2013 of increased, rather than reduced, payments to health insurers.

Possible Source

The SEC says it has evidence that former top congressional staff member Brian Sutter “may have been a source” used by a lobbyist at the law firm Greenberg Traurig LLP. The lobbyist disclosed the health policy changes to an analyst at Height Securities LLC who sent out an alert before the government announcement, according to the SEC.

Within five minutes of the Height Securities’ report, prices and trading volumes of health care insurers spiked, with Humana rising 7 percent, according to the SEC.

The agency sought the information to determine whom Sutter spoke with and if he had contact with Greenberg Traurig, according to court papers.

The committee and Sutter argued that the agency didn’t have the authority to conduct such an investigation or request the documents, because the Constitution protects members of Congress and staff from any outside inquiry into legislative business. Lawyers for the committee also argued that federal courts didn’t have jurisdiction over legislative matters or staff and hadn’t shown that any “exceptional circumstances” existed.

Attorney Response

Christopher Guest, a lawyer for Sutter, didn’t immediately return a voice-mail seeking comment. Messages left with the speaker’s office, the Office of General Counsel and the Ways and Means Committee weren’t immediately returned.

John Nester, a spokesman for the SEC, declined to comment on the decision. Kerry Kircher, the top lawyer for the House, didn’t immediately respond to a voice-mail message left at his office seeking comment about the ruling.

House lawyers asked Gardephe later Monday to give them 45 days to respond to the order, rather than the 10 the judge allotted.

Congressional staff members were also ordered to produce documents sought by the regulator which they argued shouldn’t be made public. Gardephe also denied a request by a House subcommittee to move the case from Manhattan to Washington, noting that the SEC says its insider-trading probes are conducted in New York.

Explanation Demand

In June 2014, Gardephe granted on a preliminary basis the SEC’s request to direct the committee and Sutter to appear before him to explain why they shouldn’t have to provide documents sought by the regulator. He later agreed to put that decision on hold pending the one he issued last week.

A special legal expense trust fund was set up for Sutter by his lawyer, Guest, in late 2014. Filings with the U.S. House show that two members of the Ways and Means Committee, Pat Tiberi of Ohio and Diane Black of Tennessee, soon after contributed a total of $6,000 through their leadership PACs to the fund.

Tiberi earlier this month had unsuccessfully sought to succeed new Speaker Paul Ryan as the Ways and Means chairman. The filings for the Sutter legal expense fund show he gave the fund maximum of $5,000 on Dec. 15, 2014, through his Pioneer Political Action Committee. Black gave $1,000 to it on Dec. 10 through her DIANE PAC.

The case is SEC v. Committee on Ways and Means of the U.S. House of Representatives, 14-mc-00193. U.S. District Court, Southern District of New York (Manhattan).

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