Well, the bull market is back, and it was officially the shortest bear market of all time (based on a textbook definition). It’s been a pretty wild ride… but the thing is, I don’t buy into this massive rebound just yet.
Of course, that’s just my opinion — no one really knows what the overall market is going to do. However, I am starting to notice dark pool activity start to creep back in.
What does that signal to me?
Some of Wall Street’s largest players are starting to regain confidence in their ideas, and may start to place massive trades very soon. However, I’m not going to play their game because I know holding anything overnight is probably going to be a crap shoot, and I’m not a gambler.
In the meantime, I believe protecting capital is still the number one priority… but I do need to fill my time up with research. Over the weekend, as I was searching for potential plays, I came across a case that I wanted to bring to your attention.
This case proves that we’re not on a level playing field (or so these Wall Street fat cats think), and the hedge funds do have an upper hand.
There’s a saying on the street, “You knew, or you should’ve known”… and that quote applies perfectly to this company.
Nearly all companies have policies longer than Moby Dick explaining do’s and don’ts for investment advisors and hedge fund advisory firms.
However, there was one hedge fund that just didn’t care and “forgot” about all of the policies in place.
And it’s costing the company millions of dollars.
Enter Deerfield Management Company, the hedge fund advisory firm under fire.
And it’s dead center in a trading scheme that involves nonpublic government info. That’s a no-no, and just something everyday people don’t have access to… nor would they even think about using the information.
The scam took place between May 2012 and November 2013. Although this happened years ago, we still see some wild trading activity in the dark pools — seemingly long-shot bets being placed that indicate something fishy is going on.
Here’s how things went down…
Former government employee, David Blaszczak found his niche as a political intelligence consultant (talk about a grand job title). He would gather information about up and coming decisions by the Center of Medicare and Medicaid Services.
He received this intel from his good friend that worked at the agency, Christopher Worral.
They Should’ve Known Better…
Blaszczak received 3 separate tips from his good friend Worral. And in the spirit of giving he shared this info with 2 analysts at a hedge fund advisory firm that he worked with as well.
Surely you guessed where these two analysts worked… Deerfield Management Company!
The info these men received involved hush hush CMS financial decisions. Decisions that involved the amount of money companies would receive from Medicare for cancer treatments or kidney dialysis.
The Deerfield analysts, Theodore Huber and Jordan Fogel used this nonpublic info to make $3.9 million in illegal profits.
And while these 4 are catching heat for committing one of the worst crimes in the financial industry, Deerfield’s 2 analysts turned the spotlight on their firm and its internal issues.
The Company Loophole
Deerfield set up its compliance manual in 2012. In 2013 it was revised, and that version stayed in effect until 2014. Now both versions of the compliance manual had the same information on misusing nonpublic info. It includes the obvious policy of not misusing nonpublic info.
The manual also pointed out 2 main concerns that could come up with the company’s employees.
One explained that since Deerfield researches the healthcare sector sometimes it receives nonpublic information. Despite efforts to avoid it.
The other explained that at times Deerfield itself might also have nonpublic information that could relate to investment activity or business.
Pretty vague… and weird, if you ask me.
Deerfield often tapped research firms and political intel analysts like─── drum roll please─ David Blaszczak.
And this road could also lead to Deerfield employees receiving nonpublic information. Deerfield’s error was that it never set up boundaries for this information. Instead, Deerfield allowed its employees to “police” themselves.
Employees at Deerfield were supposed to pinpoint when they receive info that COULD BE nonpublic. Then report the concerning information to the CFO, COO, or the Head Trader.
This self-policing was the BIG problem with Deerfield, the one that cost millions.
When 2013 rolled around, Deerfield finally decided to look into its research firms.
One research firm had a certain political intelligence analyst that also was the firm’s COO.
Can we say “conflict of interest”?
But Deerfield held onto this firm, despite this massive and shady staffing error. The guy that policed compliance was also the person who needed to be policed the most.
It’s not surprising this guy went to the dark side. Soon this political intel analyst cough cough… Blaszczak was exchanging multiple emails with 2 Deerfield analysts. Many of these emails include nonpublic information that was supposed to be policed and reported.
Deerfield analysts, Theodore Huber and Jordan Fogel took this information and traded on it.
Now the big problem here is not that this duo made $3,946,267 illegally. But Deerfield also profited from the trades. Deerfield received around $714,110 in performance-based compensation.
So, guess who is now on the hook for the $4.6 million to settle changes? Deerfield!
The Co-Chief of the SEC Enforcement Division’s Market Abuse Unit specifically addresses the issue saying “An investment adviser’s policies and procedures must be tailored to address the specific risks presented by its business. Deerfield relied on political intelligence firms, creating a risk that it would receive and trade on illegal inside information. As it turns out, that is exactly what happened”.
Despite the financial watchdogs on the hunt for these shady companies, there are still some wild trades that go on in the dark pools… ones that are so massive and indicate the trader(s) behind the play have a high conviction.
If you don’t know what dark pool activity is… then you’ll want to find out why I think it’s the number one indicator out there for generating trade ideas with ease.