Insider Trading: Pharma Employees Increasingly In SEC Crosshairs

Every year, Pfizer Inc. employees must complete an "Integrity Pledge," in which they promise to follow company policies that prohibit them from trading securities based on nonpublic information they obtain in their jobs.

Michael Maciocio dutifully signed the pledge during his tenure at the company as an associate research fellow and then a director of chemical research and development. But it did not deter him from buying stock in firms about to sign deals with Pfizer, and last week he pled guilty to insider trading.

Maciocio is among three people in the pharmaceutical arena to face insider trading charges this month. The most high-profile case is that of Gordon Johnston, former deputy director of FDA's Office of Generic Drugs.

The Securities and Exchange Commission announced insider trading charges against Johnston and two hedge fund managers, and the US Attorney's Office for the Southern District of New York unsealed criminal charges against him. Johnston pled guilty to four counts of securities and wire fraud (Also see "Insider Trading By Ex-FDA Official Puts Spotlight On Current Agency Practices" - Pink Sheet, 15 Jun, 2016.).

Johnston was the Generic Pharmaceutical Association's VP of regulatory science at the time of the improper trading. The government claimed he used his position at the association to get information from a former FDA colleague, a division director in the Office of Generic Drugs (OGD), about the status of an ANDA for a generic version of Sanofi's blood thinner Lovenox (enoxaparin) and passed the details on to Sanjay Valvani, a portfolio manager at Visium Asset Management. Valvani, who had retained Johnston as a consultant, was charged with him. Six days later, Valvani was found dead from suicide.

GPhA would not comment on the case. But the complaint says Johnston concealed his role as a hedge fund consultant from the association, which was "unaware that Johnston conveyed information he learned from his conversations with the FDA official and other OGD personnel to Valvani or any investor."

The SEC also notes that Johnston's contract with GPhA required him to use all of his time during working hours for the association's business and forbade him from disclosing information he learned relating to the association or its members.

FDA declined to comment on its policies regarding employee confidentiality of agency information or measures it has taken to secure access to its drug application tracking system. The case has prompted renewed Congressional oversight of FDA's practices to protect confidential information (see related story, (Also see "FDA's Confidential Information Protections Draw Questions From Congress" - Pink Sheet, 27 Jun, 2016.)).

A Gamble On Not Getting Caught

Corporations and associations typically have policies against insider trading. A spokesperson for the Biotechnology Innovation Organization said the group trains its employees from their very first day on the job to ensure they understand its policies on possible conflicts of interest and matters of the law relating in insider trading. BIO also prohibits any outside employment that could create the appearance of conflict of interest.

Its employee handbook states that employees "will not make or direct, or recommend to any other person, any investments in BIO member companies or any other biotechnology company based on 'inside information,' or material, non-public information about a corporation, that may have been obtained because he or she is a BIO employee."

Of course, policies cannot prevent insider trading and employees of companies in all industries have repeatedly used their inside knowledge about events to make a profit, gambling they will not be caught. It is a huge risk, however. A look at the recent pharma-related SEC complaints reveals the information that the government can gather once it sets its sights on someone.

The SEC complaint against Pfizer's Maciocio and stockbroker David Hobson, a friend of Maciocio's since childhood, cites the exact time of phone calls and emails between Maciocio and Hobson, the times Maciocio visited a financial website from his company-issued computer to obtain information about companies that Pfizer was considering deals with, and the timing of their trading of company shares.

Pfizer said it identified Maciocio's improper conduct, and determined his actions "breached the company's policies on business conduct." The company then terminated his employment and informed the SEC.

SEC's complaint alleges that from 2008 to 2014, Maciocio tipped Hobson about Pfizer's potential acquisition targets and business partners and the two traded unlawfully in the securities of these companies. The SEC says Maciocio reaped over $116,000 in profits and Hobson garnered at least $187,000 for himself and at least $145,000 for his brokerage customers.

The complaint cites trades made based on information about Pfizer's potential licensing deal with Medivation Inc. and its consideration of Ardea Biosciences Inc. and Furiex Pharmaceuticals Inc. as acquisition targets. The company signed a deal with Medivation in 2008 – for development of Alzheimer's disease drug candidate Dimebon (latrepirdine) that was subsequently terminated – but did not acquire either Ardea or Furiex.

According to a June 20 court filing, Macioco pled guilty to insider trading in the securities of Ardea and Furiex. The US District Court for the Southern District of New York also filed a criminal complaint against Maciocio charging him with four counts of securities and wire fraud.

Profits and Sentencing

Johnston's behavior was apparently discovered as a result of Manhattan US Attorney Preet Bharara's investigation of Visium Asset. Bharara has led a crack-down against insider trading, pursuing numerous investigations of Wall Street firms.

According to the government's charges, Johnston did not make any securities trades himself but profited from passing information to others which caused them to purchase or sell securities. The SEC's complaint against Johnston covers the period between 2005 and January 2010. It notes that Johnston was initially paid a $3,000 per month retainer for his consulting work, which increased to $5,000 per month by the beginning of 2010, receiving hundreds of thousands of dollars in total.

As for Valvani, the SEC alleged that he reaped unlawful profits of nearly $32m for hedge funds. He also tipped fellow hedge fund manager Christopher Plaford about the status of Momenta Pharmaceuticals Inc.'s enoxaparin ANDA, the first generic version of Lovenox to be approved. Plaford was also charged with insider trading and pled guilty.

The complaint shows that the SEC tracked the emails between Johnston and Valvani, and the trades Valvani made in advance of and following Momenta's announcement of its ANDA approval.

The US Attorney's Office noted in a press release that one count against Johnston carries a maximum sentence of five years in prison and the other three each carry a maximum sentence of 20 years in prison.

But he is likely to face much less time given the sentences that others in the pharma sector have received for insider trading, which have ranged from 16 months to three years (see chart of insider trading cases below). Neither Johnston nor his attorney, Christopher Mead, of London & Mead, could be reached for comment. Mead is a former assistant US Attorney for the District of Maryland.

The day before the SEC announced charges against Johnston it filed a complaint against Akebia Therapeutics Inc.'s director of biostatistics, Schultz Chan, also known as Jason Chan. The June 14 complaint alleges that he used his knowledge about the positive results of the company's lead drug, vadadustat, ahead of the company's announcement. The name of the company and drug is not mentioned in the complaint but identifiable from the details. On Sept. 8, Akebia announced positive top-line results from a Phase II study of vadadustat for treatment of anemia related to chronic kidney disease.

The SEC says Chan made approximately $288,000 in profits in his own accounts and in the accounts of his wife and a friend whom he tipped off about the forthcoming news.

Limited Enforcement Actions

Despite the recent flurry of pharma-related insider trading cases they are not that common. In fiscal year 2015, the SEC brought 39 insider trading enforcement actions, which included 87 defendants. The cases represented 4.8% of the total 807 SEC enforcement actions for the year. The number was down from 52 in 2014 and the lowest since fiscal year 2009 when there were 37 insider trading enforcement actions.

The commission does not break down cases by industry sector. At least one of the cases last year involved a pharma employee. In February 2015, Zachary Zwerko, a former senior finance analyst at Merck & Co. Inc., pled guilty to one count of conspiracy to commit securities fraud and three counts of securities fraud. He was charged with insider trading around information related to potential Merck acquisitions and passing the information to a co-conspirator from at least 2010 through August 2014. The government said Zwerko made $700,000 in profits and his co-conspirator made $57,000.

Zwerko was sentenced to 37 months in prison followed by three years of supervised release and fined $50,000. He began serving his term in April 2016 after winning a three-month delay until after the birth of his child.

There was a flurry of cases against pharma employees in 2012. In one case, the SEC charged employees from Celgene Corp., Sanofi and Stryker Corp. with insider trading after tracing trading patterns and relationships between the employees and their former high school friends.

That year the SEC also filed complaints against executives at Bristol-Myers Squibb Co. and Takeda Pharmaceutical Co. Ltd., and settled an action against a manager at Array BioPharma Inc. (Also see "Insider Trading Spectrum: From Small-Scale Buddies To “Most Lucrative Inside Tip Of All Time”" - Pink Sheet, 26 Nov, 2012.).

Pharma companies are investigated by the SEC and DOJ for other misconduct, such as alleged kickbacks to doctors to get them to prescribe drugs. And while individuals face jail time for insider trading they are less likely to be prosecuted in other cases.

In a recent instance in which the SEC charged individuals, the commission filed a civil complaint against Aveo Pharmaceuticals Inc. and three former executives alleging that they failed to publicly disclose that FDA had recommended that the company conduct an additional clinical trial of tivozanib in development for renal cell carcinoma (Also see "Tivozanib Communications Come Back To Haunt Aveo, Former Execs" - Pink Sheet, 4 Apr, 2016.).

The government has a harder time holding individual employees liable for actions directly related to their jobs. For example, the US Attorney's Office for the District of Massachusetts lost its case against W. Carl Reichel, former president of Warner Chilcott's pharmaceutical division, when a jury acquitted him of conspiring to violate the anti-kickback statute (Also see "Acquittal Of Former Warner Chilcott Exec May Make Future Prosecutions More Difficult" - Pink Sheet, 17 Jun, 2016.).