BREAKING – Probe Deepens of Alleged Inside Trades at FDA

BREAKING – Probe Deepens of Alleged Inside Trades at FDA

June 6th, 2011 // 12:53 pm @

A federal inquiry into insider trading at the Food and Drug Administration, which has focused on an agency chemist who was charged in March, is expanding to look at other government employees, according to people familiar with the matter.

Cheng Yi Liang, a longtime chemist at the FDA, and his son Andrew, who didn’t work at the agency, were charged March 29 by the Department of Justice and the Securities and Exchange Commission with trading stocks of drug companies in advance of agency approval decisions.

Dr. Liang’s lawyer didn’t return repeated emails and calls seeking comment. Andrew Liang’s lawyer declined to comment.

Another person Justice Department officials have sought information from as part of the expanded investigation is a second scientist at the FDA, according to people familiar with the matter. He hasn’t been charged with wrongdoing or named in court documents.

Judith Wheat, a defense lawyer working for the second scientist, said her client had no involvement in Dr. Liang’s alleged insider trading. A spokeswoman for the Justice Department declined to comment.

The government originally said it didn’t believe there was a tightly organized ring of inside traders. People familiar with the case said authorities now believe Dr. Liang’s alleged activities may have involved others, including federal employees.

The government is examining whether any of these people helped Dr. Liang, profited from his trades or independently began their own trading based on his information.

The case comes at the time of an unprecedented crackdown on insider trading.

In the past 18 months alone, the U.S. has criminally charged nearly 50 hedge-fund managers and others with insider trading; about three dozen now have been convicted or have pleaded guilty.

Mr. Liang isn’t the only regulator ensnared in the investigations. Last week, a former Nasdaq Stock Market official who was entrusted with sensitive details about companies that trade on the exchange pleaded guilty to fraud for trading using that information.

The insider-trading case has jolted the agency because Dr. Liang worked on new-drug approvals, a visible and sensitive area for the FDA. The SEC filed an amended complaint Thursday against Dr. Liang accusing him of continuing his illegal trading even after his arrest. The SEC says Dr. Liang received more than $3.6 million from trades involving 20 companies.

Dr. Liang allegedly got a jump on market-moving news by using an internal FDA data system, set up at the agency around 2006, that contained information on drug approvals or delays.

Dr. Liang allegedly bought stock for profit before positive announcements, bet on shares falling after negative ones, and sold shares to avoid losses, according to court documents.

Federal prosecutors and the Liangs have been negotiating a possible plea bargain in recent weeks, according to court documents.

A preliminary hearing for Dr. Liang was postponed in April, and court documents said the parties are working on a “resolution” of the case.

People familiar with the case said authorities now believe Dr. Liang’s alleged total gains may have been much higher—the government is looking at the possibility Dr. Liang and others began insider trading earlier than 2006, the first year cited in the government complaint, these people say.

Dr. Liang, 57, set up trading accounts at Scottrade and Ameritrade using other people’s names, the SEC complaint says. According to people familiar with the case, the government is attempting to persuade the Liangs to disclose more about those accounts and the people tied to them, including individuals based in China, where Dr. Liang was born.

One account was in the name of Honami Toda, a woman with an address in Rockville, Md., according to the SEC. The woman is the wife of a foreign pharmaceutical executive, and is being sued by the SEC in relation to the Liang case.

Her lawyer didn’t return calls or emails seeking comment.

Property records show the house at that address is owned by Jian Zhou, a scientist at the National Institutes of Health.

In an interview, Dr. Zhou said he had no knowledge of any insider trading.

He said he had allowed people from Japan to use his address.

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