'Political Intelligence' from Capitol Hill Raises Eyebrows

Sunday, 12 May 2013 05:39 PM

By Michelle Smith

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Average Americans do not have pipelines of information from Congress to aid their investing decisions. But “political intelligence” firms are providing some investors with just that.

Political intelligence firms are essentially companies that provide investors with market sensitive political information.

“You have people who troll the halls of Capitol Hill, the halls of agencies...and are providing that information, that service to a client,” said Jacob Frenkel, a former SEC attorney. “These companies also sell this information to hedge funds, to professionals who trade on Wall Street,” he told CNBC.

Forbes Columnist: ‘Who the Hell Cleared This?’

But some of the information that these firms offer comes from special direct access that they are able to provide investors, like private meetings with congressional staffers.

For example, in March, a firm called Capitol Street arranged a meeting in which an aide of Senator Orrin Hatch discussed the outlook for a decision on potential federal funding for insurers who participated in the Medicare program.

After the call, in which the aide said she was “definitely more optimistic,” there was a surge in speculative trading of health care company Humana, to about 10 times the trading volume of the previous two weeks, according to the Washington Post.

Several weeks after that call, a positive funding decision was announced, proving to be a big win for those who were betting on it.

Another Washington Post article says the SEC issued subpoenas for an analyst, a lobbyist and a law firm following a leak about that funding decision. Brokerage firm Height Securities reportedly alerted clients that lawmakers were set to provide the funding 18 minutes before trading closed on April 1. Trading of Humana and Aetna surged in those final minutes, the Post reported.

There is growing concern about the ethics of political intelligence services. And some point to the growing risks of insider trading.

“This is really about expert networks inside the beltway,” Frenkel told CNBC.

A congressional ethics attorney and former counsel to the House, Stan Brand, offered his take as to why the interaction between Capitol Hill and investors seems to be growing. “I think the financial meltdown and the ensuing interest in regulation of the markets and how they are impacted by Washington has made this a more recurrent issue,” he said in the Washington Post.

And though it may be an issue, the more pressing question seems to be whether it is legal. Having information travel down the pipeline from Washington clearly seems to be a potentially lucrative advantage for privileged investors. However, when properly conducted, there appears to be no law against it.

Take the case of Senator Hatch's aide providing what could arguably be considered free analysis. Brand deemed prosecution of such an act as unlikely.

“I think that would be a tough row to hoe,” he told the Washington Post.

Forbes Columnist: ‘Who the Hell Cleared This?’

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