Adviser Fails to Implement Effective Insider Trading Policies and Procedures in Connection with its

August 21, 2017

The SEC brought an enforcement action against Deerfield Management Company, L.P., an investment adviser located in New York, New York, for failing to implement adequate insider trading procedures.  The SEC stated that from 2012 through 2014, Deerfield failed to establish, maintain, and enforce policies and procedures reasonably designed to prevent the misuse of material, nonpublic information, particularly taking into consideration the nature of Deerfield’s business. Deerfield conducted extensive research in the healthcare sector, which helped inform the firm’s investment decisions on behalf of hedge funds it advised. As part of this research, Deerfield engaged third party consultants and research firms, including firms that specialized in providing “political intelligence” regarding upcoming regulatory and legislative decisions.

During the relevant period, the SEC found that Deerfield failed to establish, maintain, and enforce policies and procedures reasonably designed to address the risk that its employees could misuse material, nonpublic information from research firms that Deerfield retained, particularly those specializing in political intelligence. Deerfield’s policies and procedures concerning research firms required only an initial review, to be refreshed “from time to time” (according to its Compliance Manual) to ensure that the research firms observed their own policies and procedures to prevent the disclosure of material, nonpublic information. The SEC noted that Deerfield also relied on its own employees to self-evaluate and self-report potential receipt of material, nonpublic information, but failed to adopt policies and procedures to ensure that its employees did so. For example, Deerfield distinguished expert network firms from research firms. Deerfield imposed compliance requirements when its employees interacted with experts and expert network firms, but did not adopt similar safeguards for dealings with research firms.

The SEC stated that the risk posed by Deerfield’s use of research firms manifested when Deerfield analysts received material, nonpublic information from a political intelligence analyst whose research firms Deerfield retained. Until early 2013, contrary to its own policies and procedures, the SEC concluded that Deerfield failed to review the policies and procedures at one of the political intelligence analyst’s research firms. In addition, the political intelligence analyst provided Deerfield’s analysts with material nonpublic information from sources at the Centers for Medicare and Medicaid Services (CMS). However, Deerfield, according to the SEC, failed to enforce its policies and procedures requiring employees to self-report receipt of this information to certain members of the firm’s senior management.
From at least May 2012 through November 2013, the political intelligence analyst conveyed to Deerfield analysts material, nonpublic information regarding three confidential CMS decisions before those decisions were publicly announced. The Deerfield analysts based trading recommendations on that information, and Deerfield made timely trades that resulted in profits of more than $3.9 million for certain of its hedge funds once CMS announced its decisions.

Despite red flags that the political intelligence analyst was conveying material, nonpublic information to Deerfield analysts, the SEC found that Deerfield continued to retain the political intelligence analyst’s firms and did not address the weaknesses in its policies and procedures.

Click here to access the enforcement action.