FDA insider trading case a ‘nightmare’

FDA insider trading case a ‘nightmare’

April 25th, 2011 // 12:26 pm @

A federal chemist who learned from his agency’s database that it was about to approve Vanda Pharmaceuticals’ schizophrenia drug, Fanapt, made more than $1 million trading on the Rockville biotech’s stock with that inside knowledge, authorities claim.

Cheng Yi Liang, 57, and his son Andrew Liang, 25, both of Gaithersburg made a nearly 800 percent profit on the deal, authorities said. In the deal, the men netted $2.27 million and are accused of using the elder Liang’s access to privileged information at the Food and Drug Administration in Silver Spring, where he worked.

“We found out about the case a couple of days ago,” said Vanda CEO Mihael H. Polymeropoulos on Thursday. “It’s very disappointing it happened in the first place, but I’m glad the system worked and they were found out.”

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On Tuesday, the Liangs were charged in U.S. District Court with wire fraud and other offenses in what a former Securities and Exchange Commission enforcement lawyer called a “nightmare scenario” for pharmaceutical and biotech companies.

“This is probably as big an insider trading case we’ll see in the Washington area,” said Jacob S. Frenkel, a partner at the Potomac law firm of Shulman, Rogers, Gandal, Pordy & Ecker.

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“This is a nightmare scenario for the pharmaceutical companies and anyone that deals with government contracts or government approvals,” he said. “This goes to the entire heart of the approval, rejection process, and the value of that information to someone who gets advanced knowledge of it and can abuse it.”

The Liangs were arrested at their home Tuesday morning, according to Justice Department officials. They are charged with conspiracy to commit securities and wire fraud, securities fraud and wire fraud in trading securities of five companies, according to a criminal complaint filed by FBI Special Agent Christine Windness and provided by the department.

Cheng Yi Liang had worked since 1996 in the FDA’s Center for Drug Evaluation Research in the Office of New Drug Quality Assessment in Silver Spring, where he had access to a list of new drug applications, according to the complaint. As of Aug. 29, the FDA was paying Cheng Yi Liang $122,744 a year.

Liang was able to glean information from nonpublic documents from an FDA internal database, Document Archiving, Reporting and Regulatory Tracking System, known as DARRTS, from July 2006 to last month, according to prosecutors. With that information, his son used accounts with online broker Scottrade to make stock trades on companies with new drug review applications. The five companies involved included two in Maryland: Vanda Pharmaceuticals and MiddleBrook Pharmaceuticals, then in Germantown.

Besides the profits from their trades, prosecutors said the two men used their inside knowledge to avoid significant losses, for a total value of $3.6 million.

Edward M. Rudnic, MiddleBrook’s founder and former CEO, declined to comment. Rudnic left MiddleBrook shortly before the company was moved to Texas by new major investors, soon after the FDA approved its Moxatag antibiotic. The company has since gone bankrupt and sold its assets.

FDA and other federal employees are barred from using nonpublic information they gain from their work for private financial gain, according to the indictment.

Judy Britz, executive director of the Maryland Biotechnology Center, said that in her more than 25 years of working in the industry, FDA officials would not even allow her to buy them a cup of coffee.

“My experience with the FDA is at all levels they’ve taken special pains to maintain their distance from industry and work in an ethical manner,” she said.

Most biotechs and pharmaceutical companies are more concerned with getting their products approved than whether workers at the FDA are using that information for personal gain, Britz said.

“This is an unusual case, an egregious violation of the ethics of anyone working at the FDA, and it certainly is concerning,” she said.

Polymeropoulos said that while the case did not have an immediate effect on Vanda, shareholders who sold shares to the Liangs were victimized by not having the same information as they did.

“I don’t think the FDA can prevent every case of criminal activity, so of course the system has to depend on good information systems, but also the integrity of the employees,” Polymeropoulos said.

The maximum penalty for conspiracy to commit securities and wire fraud is a five-year prison sentence and a $250,000 fine. The maximum penalty for wire fraud is 20 years in prison and a $250,000 fine. The maximum penalty for securities fraud is five years in prison and a $5 million fine for each count.

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