Extortion (42 page)

Indeed, when the word went out that the government might end the reimbursements, Amgen shares plunged. But at least one investor avoided those losses with two nearly perfectly timed trades. On May 4, the Kerrys sold between $250,000 and $500,000 in Amgen stock. Three days later, they sold the balance of their stock in the company, another $250,000 to $500,000, when it closed at $63.76 per share. If they had waited two weeks, these sales would have been worth between $50,000 and $100,000 less, because on May 15 it was publicly announced that Medicare would sharply limit reimbursements for treatment with Aranesp. The price dropped to $54.01, or down 15%.
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TIMING IS EVERYTHING

Joining Senator Kerry in dumping Amgen shares just in time were two senators who sat on the Health, Education, Labor, and Pensions Committee, which did not have direct oversight of Medicare but was involved in health and pharmaceutical policies in general. Senators Johnny Isakson and Sheldon Whitehouse both sold between $15,000 and $50,000 worth of Amgen stock on the same day, May 9, also avoiding large losses.
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Did Senator Kerry know the news was coming? Did Senators Isakson and Whitehouse know anything? We cannot be sure. If they had worked in the private sector, their access and timing would almost certainly have demanded an SEC investigation. Short of sworn testimony, we cannot rule out that they simply guessed right, or were lucky. Even in the private sector, they might not be proven guilty. But the timing seems far too good to be true.

A few years before this narrow pharmaceutical debate, the Kerrys went on a big stock-buying spree involving more than one hundred health care transactions over a period of several months. The end result was capital gains of at least $500,000, and possibly as high as $2 million. It happened in 2003, when Congress was debating what would become the largest overhaul of the Medicare program in its thirty-eight-year history. The Medicare Prescription Drug, Improvement, and Modernization Act created a new entitlement benefit for prescription drugs. The drug manufacturers were all for it, and why wouldn’t they be? Under the bill’s provisions the federal government would pay part of the cost of prescription drugs for all 44.8 million elderly and disabled beneficiaries. Health insurance companies were for it too, because the money would flow through them.

The new benefit, called Medicare Part D, subsidized approximately the first $2,500 of a senior citizen’s prescription drug costs. En route to final passage, two versions of the bill emerged. One cleared the House on June 27, 2003, and the other passed the Senate on July 7. One called for a cap on drug prices, the other did not. The drug industry stood to gain more with one than the other, but either way, the gain would be huge. Congress went into a joint conference committee on November 21 to iron out differences. It was finally signed by President George W. Bush on December 8, with no caps on drug prices.

Throughout the process, senators and representatives were buying and selling pharmaceutical stocks that would be hurt by or benefit from the legislation. Yet not everyone succumbed to temptation. Perhaps no congressman held more stock in branded pharmaceutical companies than James Sensenbrenner of Wisconsin, who owned between $1 million and $5 million in Merck stock, $500,000 in Abbott Labs, and between $700,000 and $1.2 million in Pfizer stock. To his credit, Sensenbrenner didn’t trade stock during the debate.
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By contrast, Congressman James Oberstar of Minnesota quietly sold off his shares in the generic drug manufacturer Pharmaceutical Resources (now Par Pharmaceuticals) on September 22 and October 17 as the bill moved toward passage. He sold his holdings when the stock was selling at more than $70 a share. After Bush signed the bill, shares plummeted to $40 within a few months, as generic drug makers lost some competitive advantage to name-brand drug providers. Three days before President Bush signed the Medicare legislation into law, Oberstar also sold his shares in HealthExtras (now Catalyst Health Solutions), a pharmacy insurance management services firm. After Bush signed, the stock lost close to 10% of its value.
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Oberstar had been in Congress since 1975 and knew the ways of Washington. Congressman Jeb Bradley of New Hampshire had just been seated in January 2003, yet he apparently was a quick learner. Bradley owned over $300,000 in pharmaceutical stock when he took office. By October, he’d bought additional shares of Pfizer, Merck, and Johnson & Johnson before voting in favor of the prescription drug benefit.
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Merck stock jumped 10% in the weeks following President Bush’s signing of the law. Pfizer and Johnson & Johnson were both up too.

By far the most aggressive congressional trading of pharma stock during this debate was done by Senator John Kerry and his wife. Oversight of the prescription drug plan would fall to Kerry’s committee in the Senate, so he was intimately familiar with the law and its ramifications. Kerry was opposed to key portions of the legislation and wanted to allow for the importation of drugs from Canada to keep drug prices down. But when it became apparent that importation of drugs would not pass, the Kerrys became increasingly aggressive in buying up pharma stock. In all, the Kerrys made a stunning 111 transactions of pharmaceutical companies and health insurance companies in 2003, according to his financial disclosure statements.
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They were all great picks. He bought shares of drug makers as well as the health plan companies that would actually administer the plan through Medicare. For example, throughout September Kerry made nine purchases of Johnson & Johnson stock, totaling more than $500,000.
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The Kerrys also made sixteen purchases of Pfizer stock, totaling as much as $1 million, while the legislation was being worked on in committee. When he bought the stock it was hovering in the $30 range. After the Medicare drug benefit bill passed, the stock rose to $36 a share—up 20%. On November 13 and 17, 2003, he bought at least $200,000 worth of stock in Oxford Health Plans, which provides coverage for prescription drugs. He also bought between $500,000 and $1 million of stock in United Health Group, which happened to become the largest health insurance provider under Medicare Plan D after the legislation passed. Kerry’s financial disclosure statements reveal that the amount he had invested United Health by the end of the year was between $1 million and $5 million. He bought the stock in November at around $28 a share. Months later, it was trading at $33. There were also four purchases of stock in Abbott Labs in the month of November, when it was trading at $44 a share. After Medicare Plan D passed, share prices moved up to $46. The Kerrys also bought Bristol-Myers Squibb, which was trading at around $26 a share. The stock rocketed to more than $39 after the prescription drug benefit became law.

The Kerrys also purchased shares of Cardinal Health, another Medicare Plan D provider (at least $100,000 worth), and made four purchases of Merck stock in November, of at least $240,000.
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In addition to helping drug manufacturers, the Medicare Prescription Drug Act also provided for add-on payments for certain new medical devices. The Kerrys were already invested in two venture funds focused on medical technologies, Salix Ventures II and Delphi. In 2003, they upped their investments in both. The following year they reaped capital gains of between $100,000 and $1 million.

In January 2004, after President Bush signed the law and the stock prices jumped, the Kerrys started selling some of their pharma stocks. The couple netted capital gains of between $100,000 and $1 million with their Oxford Health Plans investment alone. They also netted tens of thousands of dollars in capital gains from Pfizer, Johnson & Johnson, and Cardinal Health stocks.

It was an enormously aggressive short-term bet on pharma stock. If you look at the Kerrys’ trades in other sectors throughout 2003—transportation, blue chips, and high tech, among others—you find a regular mix of buys and sells. But of the 111 transactions involving health plans and pharma stock, 103 were buys.
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The health care debate in 2009 was a much bigger event than any of these predecessors. As we have seen, John Kerry was not alone in buying and selling shares as Congress worked to remake the health care system. Some of the most powerful men in the Senate were part of the action. At the center of forging the health care bill was Senator Max Baucus of Montana. Eventually, when the major health care and pharmaceutical companies came out in favor of the bill, it was partly thanks to a series of detailed set-asides that were of immense benefit to the industry. Baucus had a lot of influence on those set-asides because he had been tasked by the White House and by congressional Democrats to put the deal together. And during the legislative process, Senator Baucus, as he was negotiating with pharmaceutical companies and putting his imprint on the legislation, was buying and selling health care stocks. Baucus does not do a lot of stock trading, and he’s not a wealthy man. He is no John Kerry. Indeed, he’s not even in Kerry’s financial universe. But during 2009, as he was shepherding health care legislation in the Senate, fully 20% of Baucus’s stock transactions involved health care—related stocks. He bought Gilead Sciences, Abbott Labs, and Fluor Corporation (which is not a health care company but is heavily involved in the sector, building hospitals and medical care centers). All three were perceived winners in the health care debate. And he seemed to do pretty well. He bought Abbott at around $45 a share. After health care reform passed, it soared to $54 a share. All three firms lobbied in favor of the legislation.
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Congressman John Boehner, who was leading the opposition to Obamacare in the House of Representatives, may have been fighting John Kerry on policy matters, but he was entirely allied with him when it came to investment decisions. On December 10, 2009, Boehner bought numerous health insurance company stocks, including tens of thousands of dollars in Cardinal Health, Cigna, and Wellpoint. On the same day, Boehner purchased shares in the Big Pharma companies Amgen, Johnson & Johnson, Forest Labs, Covidien, and Pfizer. He also bought shares in CareFusion, which provides systems for countering infections.
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Just days later, on December 15, the
Washington Post
declared that the “public option” was officially dead.
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Health insurers breathed a sigh of relief. So too did pharmaceutical companies, who feared that a government health insurance program would lead to price controls. When Boehner bought Wellpoint stock on December 10, the price was about $56 a share. Within a month it was trading at $66 a share. Cardinal Health was up approximately 10% by the time President Obama signed the health care bill. In early 2010, Boehner bought yet more shares in Cardinal Health and Pfizer, before President Obama signed the health care bill.

Sometimes members of Congress see an opportunity for big profits from a smaller, more obscure bill (health-related or otherwise). This approach has certain advantages. The chances of being detected are smaller, and if the focus of the bill is narrow enough, it can mean even more profits. Such was the case in the spring and early summer of 2004, as Congress debated and eventually passed something called Project Bioshield.

Concerned about the possibility of a biological weapons attack or the prospect of a pandemic, legislators submitted a bill that called for $5 billion to be spent on vaccines that would be used in the event of a bioterrorist attack or disease outbreak. The idea behind Project Bioshield was simple: pour billions into small, specialized biotech companies that were developing vaccines and other biochemical defenses. The Department of Health and Human Services was moving forward with plans to acquire a second-generation smallpox vaccine and antidotes to other chemical, biological, and radiological weapons. The government wanted to develop, purchase, and stockpile vaccines and drugs to fight anthrax, smallpox, and other potential agents of bioterror.

The largest financial beneficiaries of this money would be specialized biotechnology companies. The bill sailed through both houses of Congress and was signed by President Bush on July 21, 2004. But in the weeks before Bush acted, several congressmen made highly profitable “bets” on the companies that would benefit.

Congressman Jim McDermott of Washington State bet big on one small biotech company as Project Bioshield was working its way through the House. McDermott, a member of the powerful Ways and Means Committee and a medical doctor by training, took more than 10% of his entire investment portfolio at Wells Fargo and bought shares in a small Canadian company called ID Biomedical on June 7, 2004, just weeks before he voted for the bill. The firm just happened to produce disease vaccines, exactly the kind that Project Bioshield was looking to fund. Over the next several years, the firm would do a considerable amount of business with the federal government. With the passage of Project Bioshield, ID Biomedical would secure $8 million from Washington to develop a plague vaccine.
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McDermott’s timing was nearly perfect. He bought 2,000 shares at $10 a share, paying a total of $21,021, according to his brokerage statement. He sold the stock a little more than a year later, on September 21, 2005, nearly tripling his money, cashing it in for $58,837. This represents a return of 180%.
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