House committee ordered to hearing as SEC probes insider trading

NEW YORK/WASHINGTON Fri Jun 20, 2014 8:19pm EDT

The seal of the U.S. Securities and Exchange Commission hangs on the wall at SEC headquarters in Washington, June 24, 2011.  REUTERS/Jonathan Ernst

The seal of the U.S. Securities and Exchange Commission hangs on the wall at SEC headquarters in Washington, June 24, 2011.

Credit: Reuters/Jonathan Ernst

NEW YORK/WASHINGTON (Reuters) - A U.S. judge on Friday directed the House Ways and Means Committee and a staffer to appear at a July 1 hearing to address their alleged refusal to respond to U.S. Securities and Exchange Commission subpoenas as part of an insider trading probe.

The order by U.S. District Judge Paul Gardephe in New York covers both the committee and Brian Sutter, staff director for its healthcare subcommittee, and came at the SEC's request.

The SEC said it is examining whether material nonpublic information concerning an April 1, 2013 announcement by the Centers for Medicare and Medicaid Services of 2014 reimbursement rates for a Medicare program was leaked improperly, and whether anyone traded on that information.

The case could prompt a courtroom showdown between the SEC's authority to enforce U.S. securities laws against Congress' power to manage its own affairs.

"This cannot be good for inter-governmental relations between the SEC and Congress," said Bradley Bondi, a partner at Cadwalader, Wickersham & Taft and former counsel to two SEC commissioners.

The House committee has resisted the subpoenas, in part by arguing that the U.S. Constitution shields lawmakers from having to testify or turn over documents.

"The SEC subpoenas run seriously afoul of the Constitution’s Speech or Debate Clause, and we expect to respond in due course on that ground, among others," Kerry Kircher, general counsel for the House of Representatives, said in an email.

Sutter's lawyer declined comment.

The court filings followed earlier reports of an insider trading investigation into whether congressional staff helped tip traders about the CMS announcement.

"Immunity will be the focal point of the legal controversy," said Karl Manheim, a professor at Loyola Law School in Los Angeles.

HEALTH STOCKS

The initial SEC subpoena to the House committee was previously disclosed by the committee's chairman, Rep. David Camp (R-Michigan), according to the May 9 Congressional Record.

That same day, Sutter disclosed receiving subpoenas from the SEC and a grand jury in Manhattan.

In court papers on Friday, the SEC said it was looking into an email a lobbyist at the law firm Greenberg Traurig sent to broker-dealer Height Securities regarding a deal struck in Congress about the Medicare rates.

It said that email was 70 minutes before CMS announced the rates after U.S. markets closed, and about 30 minutes before Height issued a report suggesting that the change could help companies such as Humana Inc and Health Net Inc.

The SEC said the share prices of both companies jumped after the report, with Humana's rising 7 percent in the last 15 minutes of trading.

Sutter, meanwhile, had on the day of the announcement been emailing the Greenberg Traurig lobbyist about the termination of a client from the Medicare program, the SEC said. Both then spoke on the phone for three minutes, which was 10 minutes before the lobbyist emailed Height, the SEC said.

Greenberg Traurig spokeswoman Jill Perry said: "We are cooperating with the inquiry and will continue to do so." A Height spokesman did not respond to a request for comment.

STOCK ACT

The SEC's investigation marks what is likely the first ever to invoke provisions of a 2012 law called the STOCK ACT, which seeks to prevent people from using "political intelligence" to illegally trade on material, non public information.

The SEC in its motion called the House's decision to resist turning over documents "particularly odd" and "unwarranted" in light of the STOCK Act's passage.

Andrew Ceresney, the head of the SEC's enforcement division, was among a group of lawyers who penned a legal memo analyzing the impact when he previously worked at Debevoise & Plimpton in 2012.

In that memo, Ceresney and the other attorneys conceded that despite the passage of the law, there is still some ambiguity over what constitutes "material nonpublic information" in this context.

Harvey Pitt, a former SEC chair, said he believed even before the STOCK Act, the agency could have subpoenaed documents from Congress that might relate to securities law violations.

"After the STOCK ACT, I don't doubt the SEC is well within its right to obtain information of possible insider trading violations," he said, calling the lack of production "startling."

The case is SEC v. Committee on Ways and Means of the U.S. House of Representatives et al, U.S. District Court, Southern District of New York, No. 14-mc-00193.

(Reporting by Nate Raymond and Jonathan Stempel in New York, and Sarah N. Lynch and Emily Stephenson in Washington, D.C.; Editing by Chris Reese, Bernard Orr)