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Washington insider's 'secret sauce' fueled NY hedge fund, U.S. says at trial

NEW YORK (Reuters) - A federal prosecutor said a political consultant used his Washington contacts as his “secret sauce” to uncover market-moving tips about policy decisions from a U.S. healthcare agency, enabling a big New York hedge fund firm to conduct insider trading.

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The comment by Assistant U.S. Attorney Joshua Naftalis in Manhattan federal court came on Monday as an insider trading trial got underway. All four defendants have pleaded not guilty, over the passing of “political intelligence” to Wall Street from inside the Beltway.

Prosecutors say the consultant, David Blaszczak, accepted tips from Christopher Worrall, who worked for the U.S. Centers for Medicare and Medicaid Services, about government plans to lower reimbursement rates for the costs of radiation cancer treatment and kidney dialysis.

Blaszczak, a former CMS employee, then allegedly passed tips to former Deerfield Management Co partners Ted Huber and Rob Olan, collecting fees while that hedge fund made $7 million of illegal profit.

Not all of Blaszczak’s tips panned out, but Naftalis told jurors that “just because the defendants didn’t bat 1.000 didn’t mean they weren’t playing the game.”

He said Blaszczak’s “network of friends was his secret sauce,” while Deerfield was “in it for the money” and Worrall hoped his tips would land him a lucrative private sector job.

The alleged scheme showed an “unbroken criminal chain that went from Washington to New York,” Naftalis said.

But in his opening statement, Blaszczak’s lawyer David Patton said there were “zero allegations” anyone was paid for tips, and that “there was no secret mole inside” CMS, whose information was “constantly” shared outside the agency.

“If New York is the town that never sleeps, D.C. is the city that never shuts up,” Patton said.

John Nathanson, a lawyer for Worrall, said much information his client had been accused of leaking was public, and denied there was any quid pro quo.

“The government’s theory is he threw away 18 years of hard work,” Nathanson said. “Yeah, he got opportunities. He didn’t take them.”

A former Deerfield partner, Jordan Fogel, has pleaded guilty and is expected to testify for the government.

He was a target of Barry Berke, a lawyer for Huber, who told jurors that Fogel had “abused his colleagues behind their back” and would “continue to abuse the truth.”

Deerfield agreed last August to pay $4.6 million to settle a related U.S. Securities and Exchange Commission civil case, without admitting or denying wrongdoing.

Olan’s lawyer will address jurors on Tuesday. The trial may last five weeks.

Reporting by Brendan Pierson and Jonathan Stempel in New York; Editing by Leslie Adler, Richard Chang and David Gregoroi