Rapid Clinical Developments Increase Insider Trading Risks

By Christopher Conniff and Eve Shabto
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Law360 (May 5, 2020, 4:33 PM EDT) --
Christopher Conniff
Christopher Conniff
Eve Shabto
Eve Shabto
Across the globe, there are more than 3.5 million confirmed cases of COVID-19, while millions more are likely carrying the virus, and related deaths are over 250,000.[1] In response, companies in the life sciences industry are not only analyzing global health data and conducting research, but also seeking to develop vaccines and treatments that target the infection caused by COVID-19.[2]

The urgent need for testing, vaccines and treatments is creating a surge of new research and potential breakthroughs at many pharmaceutical and life sciences companies. While this is welcome news for people around the world, it also increases the opportunities for those seeking to illegally profit from the crisis, including those wishing to trade on material, nonpublic information.

This will be true particularly for publicly traded pharmaceutical and life sciences companies, as well as asset managers with a specific focus on this industry. As such, it is a good time for compliance officers to increase policing and education in this important area. No company wants the celebration of a critical health breakthrough to be dampened by the reputational harm of an insider trading investigation of one of its employees.

Historical Perspective

Insider trading around the U.S. Food and Drug Administration's approval of a new drug or the announcement of clinical trial results is nothing new. In fact, the U.S. Securities and Exchange Commission and the U.S. Department of Justice have long shown interest in these types of cases.

In 2014, a former executive of a multinational pharmaceutical company was sentenced to 16 months in prison for insider trading after cooperating with prosecutors.[3] This executive, along with executives at other drug companies, were found to have participated in an insider trading scheme that netted at least $1.4 million in profit off pharmaceutical and medical-technology company tips. All six conspirators were charged with insider trading and pleaded guilty.[4] The group also settled with the SEC, agreeing to pay approximately $1.7 million in fines.[5]

In 2016, the SEC brought charges against the wife and brother-in-law of an officer of Alimera Sciences Inc., a Georgia-based biopharmaceutical company. The wife and brother-in-law traded on confidential information that the Alimera executive had provided them about the struggles the company was having with getting FDA approval for a new diabetes drug.[6] Both ultimately settled the matter and agreed to pay the federal government more than $100,000 in penalties, interest and illegal gains.

The government has demonstrated its intent to punish not only the corporate insiders but also firms seeking to profit from this illegally obtained information. In 2013, SAC Capital Advisors LP agreed to pay a record $1.8 billion fine for insider trading in connection with several insider trading schemes. One of the schemes involved a portfolio manager for SAC who obtained material, nonpublic information, or MNPI, concerning an Alzheimer's drug that was being developed by two pharmaceutical companies, Elan Corporation and Wyeth.

The analyst obtained the MNPI by speaking with a doctor involved in the clinical trials of the drug. Armed with this information, he illegally earned profits and avoided losses for the firm of approximately $275 million.[7] The U.S. attorney's office in New York convicted the analyst of insider trading. He was sentenced to nine years in prison and ordered to forfeit his $9.38 million bonus. SAC itself paid a $602 million fine to the SEC to settle these charges.[8]

The DOJ and SEC also brought charges against two portfolio managers at the hedge fund Visium Asset Management, alleging that they traded on inside information about FDA approvals of particular generic drug applications. The confidential information in this case came from an insider at the FDA.[9] The firm ultimately paid $10.2 million to settle this matter and one of its portfolio managers pleaded guilty to criminal insider trading charges.[10]

Regulators Have Publicly Announced Their Intent to Pursue Anyone Seeking to Take Advantage of the Crisis

Regulators and prosecutors have recognized the increased risks to the financial markets that are presenting themselves from the current crisis and clearly intend to pursue anyone seeking to take improper advantage of the situation. For instance, the co-directors of the SEC Division of Enforcement recently issued a statement emphasizing "the importance of maintaining market integrity and following corporate controls and procedures" in these unique circumstances created by COVID-19.[11]

The division did not waste any time backing up its warning and has to date suspended trading in securities of certain biomedical and pharmaceutical companies because "questions ... [arose] concerning the accuracy and adequacy of publicly-available information concerning [such companies]."[12]

Specifically, on April 13, the SEC temporarily suspended trading in the securities of Applied BioSciences Corp. because of statements that the company made in a March 31 press release about selling coronavirus test kits for home use.[13] Citing a lack of publicly available information to verify Applied BioSciences' claims, the SEC likely took this action to prevent a potentially fraudulent investment scheme.[14]

The Commodity Futures Trading Commission and Financial Industry Regulatory Authority have signaled a similarly aggressive approach. On March 18, CFTC Director of Enforcement James McDonald issued an advisory statement on COVID-19 and reminded the public that the CFTC "will aggressively pursue misconduct in our markets tied to the impact of the coronavirus pandemic."[15]

In addition, FINRA has publicly stated that COVID-19 has had an "unprecedented impact on securities markets," and committed itself to protecting against market manipulation related to the pandemic. On March 27, FINRA Executive Vice President of Enforcement Jessica Hopper pledged that "[n]ow, more than ever, it is important that FINRA Enforcement act quickly and aggressively to stop those who would use these uncertain times to take advantage of vulnerable investors or to manipulate the markets."[16]

Finally, the DOJ has made clear that detecting, investigating and prosecuting wrongdoing related to the crisis is a top priority. On March 16, Attorney General William Barr asked the department's lawyers to prioritize enforcement related to COVID-19-related crime. The attorney general directed all to "work closely with state and local authorities to ensure that [the DOJ] hear[s] about misconduct as quickly as possible and that all appropriate enforcement tools are available to punish it."[17] On March 24, Barr followed up his previous statements by announcing the creation of a national task force to combat COVID-19-related crime, including market manipulation, hoarding and price-gouging.[18]

This is a good time for compliance officers at asset managers to remind their teams about the risks associated with interacting with public company employees and industry experts. Compliance officers should also refresh employees on the best practices for avoiding the inadvertent receipt of MNPI.

Take advantage of law firm relationships and ask your service providers to provide tip lists or virtual training sessions. Remind your teams that it is always advisable — when speaking to public company employees — that they communicate to public company employees that the firm trades securities and is not interested in receiving MNPI.

Also remind team members that it is helpful to keep your legal and compliance teams informed of such interactions, and the compliance team should consider if it may monitor these cases. It is also essential to remind investment team members that if they receive information and are not sure if it is MNPI, they need to seek guidance from their legal and compliance teams.

How Companies in the Life Sciences Space Can Mitigate Insider Trading Risks

There is no question that companies are dealing with a myriad of serious issues arising out of the pandemic. Amid this chaos, companies cannot lose sight of the need to maintain a compliant work environment, including rigorous enforcement of MNPI policies and the importance of keeping confidential information internal to the company, especially as the workforce may be dispersed or working remotely.

As such, this is a good time for legal and compliance officers to run appropriate testing mechanisms to insure that employees are complying with all rules regarding data confidentiality and to conduct "virtual" trainings to remind everyone of the rules in place and how the crisis may impact them.

Finally, steps unique to the crisis may also be necessary, including: reminding all personnel of the additional risks to MNPI from working remotely; reexamining internal controls related to trading in the company's securities; and detecting unusual trading around significant company disclosures. By following these simple rules, companies can remain compliance-healthy during these difficult times.



Christopher Conniff is a partner and Eve Shabto is an associate at Ropes & Gray LLP.

The opinions expressed herein are those of the author and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] https://ourworldindata.org/grapher/total-cases-covid-19

[2] https://www.marketwatch.com/story/these-nine-companies-are-working-on-coronavirus-treatments-or-vaccines-heres-where-things-stand-2020-03-06.

[3] https://archives.fbi.gov/archives/newark/press-releases/2014/former-pharmaceutical-executive-sentenced-to-16-months-in-prison-for-central-role-in-insider-trading-scheme.

[4] https://archives.fbi.gov/archives/newark/press-releases/2014/former-pharmaceutical-executive-sentenced-to-16-months-in-prison-for-central-role-in-insider-trading-scheme.

[5] https://www.sec.gov/litigation/litreleases/2014/lr23024.htm; https://www.sec.gov/litigation/admin/2013/34-70659.pdf; https://www.sec.gov/litigation/admin/2013/34-70658.pdf.

[6] https://www.sec.gov/litigation/admin/2016/34-79581-s.pdf.

[7] https://www.justice.gov/usao-sdny/pr/sac-capital-portfolio-manager-mathew-martoma-sentenced-manhattan-federal-court-nine.

[8] https://www.reuters.com/article/us-usa-insidertrading-saccapital-idUSKBN0U717A20151224

[9] https://www.sec.gov/litigation/admin/2018/33-10494.pdf

[10] https://www.justice.gov/usao-sdny/pr/hedge-fund-portfolio-manager-sanjay-valvani-and-former-portfolio-manager-stefan-lumiere.

[11] Securites and Exchange Commission, Statement from Stephanie Avakian and Steven Peikin, Co‑Directors of the SEC's Division of Enforcement, Regarding Market Integrity, March 23, 2020, available at https://www.sec.gov/news/public-statement/statement-enforcement-co-directors-market-integrity.

[12] https://www.sec.gov/litigation/suspensions/2020/34-88627.pdf; see also https://www.sec.gov/litigation/suspensions/2020/34-88623.pdf.

[13] https://www.sec.gov/litigation/suspensions/2020/34-88627.pdf.

[14] https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-alerts/look-out.

[15] https://www.cftc.gov/PressRoom/PressReleases/8134-20.

[16] https://www.finra.org/rules-guidance/enforcement.

[17] https://www.justice.gov/ag/page/file/1258676/download.

[18] https://www.justice.gov/file/1262776/download.

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