Former FDA exec charged with securities fraud, along with two hedge fund managers
A shocking case of insider trading has rocked the drug development world and beyond.
Earlier this month, a former FDA official and two hedge fund managers were indicted for insider trading that made them unlawful profits of about $32 million.
On June 15, the Securities and Exchange Commission (SEC) charged the men with using inside information to buy stocks from companies that were soon to have generic drugs approved, with the former FDA official gleaning tips from friends still working at the FDA. According to the U.S. attorney’s office in New York, the three men colluded from 2005 to 2011.
This case marks the first time an insider trading scandal has touched the FDA. “This will have far-reaching consequences for the FDA, the stock market and the drug development industry,” said Arthur L. Caplan, the Drs. William F. and Virginia Connolly Mitty Professor of Bioethics at New York University, Langone Medical Center, in New York City. “For many, this will just confirm their biases that the whole system is rigged.”
Caplan predicts the FDA will respond by doubling its internal auditing efforts and greatly beef up its training for employees, making this case an example of what could happen to any other bad actors.
Said Caplan, “I would expect the FDA to enhance training, and to convey a general fear that if you engage in insider trading you’re very likely to get caught, and that the punishment will be tough and the humiliation will be worse.”
Neal McCarthy, managing partner of investment firm Fairmount Partners, which focuses heavily on the life sciences, said that, sadly, insider trading of this ilk probably happens far more than anyone realizes.
“I’m actually surprised that they don’t catch more people, as I think this kind of thing is more prevalent but only rarely leads to convictions,” said McCarthy. “If they can make $32 million on trading three stocks, there is a lot more money to be made—perhaps billions.”
McCarthy added that there are over 810,000 people employed by the pharmaceutical industry, and another 15,000 at the FDA, and that the vast majority of these people are men and women of science dedicated to improving the human condition. “But there are a few bad apples in every bunch,” he said.
Sanjay Valvani, a star portfolio manager with Visium Asset Management, pleaded not guilty to the charges. He was freed on $5 million bond, and was found dead in his Brooklyn apartment last Monday night, along with a suicide note that has not been made public. He was 44 years old.
The charges against him were: one count of conspiracy to convert United States property, to commit securities fraud and to defraud the United States; two counts of securities fraud; one count of conspiracy to commit wire fraud; and one count of wire fraud.
Valvani had been a parter at Visium, and had built the company into an $8 billion firm that had some of the U.S.’s biggest pension funds as clients.
The former FDA official at the heart of it all is Gordon Johnston, who recently served as a consultant to Visium. According to the SEC, Johnston worked at the FDA from 1987 through 1999, having been named deputy director of the FDA’s Office of Generic Drugs (OGD) in 1994. Johnston remained in close contact with former colleagues at the FDA while serving as vice president of regulatory sciences at the Generic Pharmaceutical Association (GPhA) from 2003 to 2011.
Said the SEC in a release, Johnston concealed his separate role as a hedge fund consultant (for which he was getting a $5,000 monthly retainer) and obtained confidential information about anticipated FDA approvals for companies to produce enoxaparin, a generic drug that helps prevent the formation of blood clots. Johnston allegedly funneled to Valvani the details of his conversations with FDA personnel, including a close friend he mentored during his time at the agency. Valvani then traded in advance of public announcements concerning FDA approvals for such companies as Momenta Pharmaceuticals, Watson Pharmaceuticals (now called Actavis), and Amphastar Pharmaceuticals.
“We allege that Valvani’s formula for trading success was tapping Johnston to abuse his position of trust as a generic industry representative to the FDA, and underhandedly obtaining confidential information from his friends and former colleagues at the FDA,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement, in the statement.
Johnston pleaded guilty to four counts: one count of conspiracy to convert United States property, to commit securities fraud, and to defraud the United States; one count of securities fraud; one count of conspiracy to commit wire fraud; and one count of wire fraud. The first count carries a maximum sentence of five years in prison, and the other counts each carry a maximum sentence of 20 years in prison. Additionally, Johnston faces a $5 million fine.
Steffan Lumiere, a former Visium portfolio manager, is the other hedge fund manager charged. He faces three counts: one count of conspiracy to commit securities fraud and wire fraud; one count of securities fraud; and one count of wire fraud. Lumiere did not enter a plea.
A third hedge fund manager, Christopher Plaford from Investment Adviser-A, a now-defunct privately held group of affiliated hedge funds and associated fund advisors that specialized in healthcare-related investments, also used Johnston’s information to make trades, court documents said. Plaford pleaded guilty to seven counts: one count of conspiracy to commit securities fraud and wire fraud; one count of securities fraud; one count of conspiracy to defraud the United States and to convert United States property; one count of conversion of United States property; one count of conspiracy to convert United States property, to commit securities fraud, and to defraud the United States; one count of securities fraud; and one count of conspiracy to commit wire fraud.
McCarthy predicts prosecutors will want to make an example of Johnston, Lumiere and Plaford, giving them tough sentences.
“The longest sentence in insider trading was given for exactly this sort of thing,” said McCarthy, pointing out that Raj Rajaratnam, the billionaire head of Galleon Group hedge fund, was sentenced to 11 years of prison and ordered to pay a $150 million penalty in 2011.
Caplan agrees that the penalties will be stiff, for the sake of the reputation of the FDA, the markets and the biopharmaceutical industry.
“This has to be taken seriously not just because of what it means to regulators, but what it means to the traders,” he said. “If you undermine faith in the market, you’re not going to have a market. People will shy away because they’ll think it’s just insiders taking advantage of everybody. And drug sponsors don’t want people dribbling out information for profits while they’re working hard to make sure their trials are viewed as being done properly and having integrity.”
This article was reprinted from Volume 20, Issue 25, of CWWeekly, a leading clinical research industry newsletter providing expanded analysis on breaking news, study leads, trial results and more. Subscribe »