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Washington consultant, 2 Deerfied Management partners get prison in insider trading case

A one-time "King of Political Intelligence" got a year in prison for insider trading — a sentence that sends a warning to Washington consultants that profiting from government secrets can be as risky as trading on confidential company information.

David Blaszczak a Washington consultant who was convicted of giving two hedge funds advance word on changes to Medicare reimbursement rates, was also ordered to forfeit $727,500 and to spend another 12 months under house arrest. A federal jury in May found that he provided the clients with tips he picked up from ex-colleagues still in the government.

"Blaszczak was unapologetic and giddy about what he was doing," U.S. District Judge Lewis Kaplan said at Thursday's sentencing in Manhattan.

Convicted with Mr. Blaszczak were his friend and source inside the government, Christopher Worrall, and two partners at Deerfield Management, Robert Olan and Theodore Huber. Mr. Worrall was sentenced Thursday to 20 months, and Messrs. Olan and Huber each got three years and were ordered to pay more than $1.3 million. Mr. Kaplan allowed all four to remain free pending appeal.

Mr. Blaszczak worked as a consultant after leaving the federal Centers for Medicare and Medicaid Services. Jurors found that, from 2009 to 2014, he passed tips to his clients about confidential plans to change government reimbursement rates for cancer and kidney disease treatments.

Although the central figure in the case, Mr. Blaszczak got the lightest sentence because his wife is suffering from a degenerative eye condition and has no one else to rely on for help.

"The wreckage that a long period of incarceration would wreak on her and your son is terrifying to me," he told Mr. Blaszczak. "You're the undeserving beneficiary" of that.

The monthlong trial opened to public scrutiny the political intelligence business, where former government employees often leverage relationships with ex-colleagues to deliver their investor clients a heads-up on planned actions that could move markets.

The trial cast a harsh light on Deerfield. The government's star witness, Jordan Fogel, a former Deerfield partner who pleaded guilty in a bid for leniency, testified that the firm used Mr. Blaszczak to gain an illegal "edge," allowing it to trade ahead of government announcements. Deerfield, which paid Mr. Blaszczak almost $1 million in fees, used the information to make more than $7 million in profit, according to prosecutors.

"Blaszczak was at the center of a brazen scheme that combined public corruption with securities fraud, and was part of a corrupt tipping chain that ran from Washington to Wall Street," prosecutors said in court papers, urging Mr. Kaplan to give Mr. Blaszczak more than five years in prison.

Mr. Fogel told jurors that Mr. Blaszczak passed along frequent updates as CMS considered the reimbursement changes, information that was often at odds with public expectations.

"It was not public," Mr. Fogel testified at the trial. "It was much different than the consensus."

The jury convicted Deerfield partners Messrs. Olan and Huber of five counts and acquitted them of five others. Mr. Worrall was acquitted of 14 counts and found guilty of just one count of theft of government property and one count of wire fraud.

Deerfield manages more than $8 billion, with investments concentrated in health-care companies. Prosecutors said others there knew that Mr. Blaszczak was passing illegal tips, including James E. Flynn, a managing partner who allegedly encouraged the practice. Mr. Flynn, who wasn't charged, was identified as a "co-conspirator" before trial, allowing prosecutors to introduce statements he made in evidence. Mr. Flynn testified for the defense.

The firm agreed to pay $4.6 million to settle U.S. Securities and Exchange Commission allegations that it failed to properly supervise its employees. It didn't admit or deny wrongdoing.

Mr. Blaszczak's lawyers claimed his success in predicting CMS actions was the result of exhaustive research based on publicly available information, not tips from a government mole. Defense lawyers called Mr. Fogel a liar and questioned why Mr. Worrall, who received no money for the alleged tips, would risk his career for nothing.

Defense lawyers also sought to convince jurors that Washington's information ecosystem operates differently than Wall Street's, with rumors flowing freely and former staffers hired into K Street lobbying shops for their connections and expertise.

Prosecutors showed the jury evidence of Mr. Blaszczak's cozy relationship with Mr. Worrall, which included lunch meetings, golf, baseball games and drinks. Prosecutors claim he wooed Mr. Worrall by inviting him to join his firm in 2014, saying they'd probably make $2 million in revenue by year's end, according to court records.

"We'd kill it working togethe[r]," Mr. Blaszczak wrote in a text message to Mr. Worrall. "You're like a drunk whore to me," Mr. Worrall replied. "Hard to resist."

Mr. Worrall didn't join Mr. Blaszczak's firm, but used his job offers to leverage a promotion at CMS, according to the government.

Mr. Blaszczak was also convicted of passing inside information to Christopher Plaford, a former Visium Asset Management portfolio manager, in a transaction that didn't involve any of the other three trial defendants. Mr. Plaford pleaded guilty and testified last year against former Visium executive Stefan Lumiere, who was convicted of mismarking bonds and is now in prison. Mr. Plaford also testified against Mr. Blaszczak.