Insider trading at the FDA

Larry Ribstein —  30 March 2011

The SEC has civilly charged an FDA employee under 17(a) and 10(b) with violating his duty of trust and confidence to the FDA and misappropriating drug approval information by using it to make $3.6 million in trading securities. The WSJ story summarizes:

The SEC and the Justice Department said the men traded shares dating back to 2006 of companies whose drugs were used for colon cancer, schizophrenia, insomnia, severe constipation, osteoarthritis and heart disease. Some of the FDA announcements at issue involved delays in the approval process due to the drugs’ safety or efficacy tests. Mr. Liang allegedly bought stock for profit before positive announcements, bet on shares falling after negatives ones and sold shares to avoid losses. * * *

[One] of the companies whose stock he allegedly traded was Momenta Pharmaceuticals Inc., a small biotechnology company from Cambridge, Mass., which was vying with two other companies to make a generic version of the blockbuster blood thinner Lovenox. The FDA unexpectedly told the companies in November 2007 that they needed to do further testing, holding up the approval process. The SEC claimed Mr. Liang made $130,000 by trading shares a day before the news was made public, cutting Momenta’s stock nearly in half. When the drug was finally approved, in July 2010, Mr. Liang made another $85,000 buying shares three days ahead of the announcement, the SEC alleged.

Well, I suppose we should be happy somebody’s benefiting from the FDA’s unpredictable and overly careful policies.  Holman Jenkins writes today about how the FDA is toying with approving, or not, a process for spotting melanomas which could cheaply and reliably save lives.  An FDA advisory panelist said, “I believe that MelaFind is going to help a few less people die and that’s why I voted yes.” But the FDA has the final say.  And Jenkins notes that while “[m]any lives will be saved, if the FDA will let them” “nobody at the FDA is ever fired for failing to approve a device.”  But apparently some do make money from the FDA’s waffling.

Finally, Liang should be sorry he’s not a Congressman, because they can trade on political information. As I noted several years ago, the solution to this trading by government agents is to “decrease government involvement in the economy. That is, after all, the source of the insider trading problem.”  Certainly that’s true in the FDA case.

Larry Ribstein

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Professor of Law, University of Illinois College of Law

2 responses to Insider trading at the FDA

  1. 

    Further insight into what my household calls the “House Hunters International Phenomenon”.

    As regular viewers, we’ve noted how more than half the buyers on the show are retiring public employees looking for a villa in the South of France. Or working public employees looking for beachfront vacation property in the Carribean. It’s become so noticeable we actually remark on it if the potential buyer is NOT a government employee.

  2. 

    This follows closely on the heels of an insider trading scandal within the Department of Education. Once you give the government the ability to dictate the profitability of businesses, you create enormous opportunities for people inside government to make their fortunes with insider information.