Pharmaceutical company stock is known to be volatile depending on success or failure of drug trials. As pharma companies become successful they become targets for larger pharma companies looking to supplement their lines. The Securities and Exchange Commission filed two actions recently for suspect trading in pharma companies.
The first case is a bread and butter insider trading case where the SEC alleges that two brokers found a source inside a pharma company that was feeding them material non public information. In the second case, the SEC charged a doctor involved in a drug trial with trading on the non-public results of the trial.
In that first case, the SEC alleges that Paul T. Rampoldi was the ringleader of an the insider trading ring at his brokerage firm. They had an insider at Ardea Biosciences. The Ardea insider tipped one of the brokers with material non-public information in at least two instances. Once was ahead of the company’s announcement of an agreement to license a cancer drug and the second was in advance of its acquisition by AstraZeneca PLC. The SEC charged the other two brokers and the Ardea employee last year. To avoid detection by his brokerage firm, they traded in an account at a different firm.
As Sharon B. Binger, Director of the SEC’s Philadelphia Regional Office, said: “As a stockbroker, Rampoldi should have known better than to allegedly trade on tips about significant corporate events before they were announced.”
In the second case, Dr. Edward Kosinski was working on the clinical trials for Regado Biosciences. He started with a small holding in the company. Small enough to be below its compliance reporting level. I assume that Dr. Kosinski must have thought highly of the drug being test because he dramatically increased his holdings in the company.
The things took a turn for the worse. The company announced problems with the trial. Dr. Kosinski did what most people would do on hearing bad news: he sold his stock. The problem was that he had signed a confidential nondisclosure agreement that, according to the SEC’s allegation, prohibited from trading on the stock based on the trial. In selling the stock, Dr. Kosinki realized a small gain and avoided a huge loss. The stock tanked when the problems were announced to the public.
When further details were announced to the trial group, Dr. Kosinski did a worse thing. He shorted the stock, buying put contracts that would make him more money if the stock dipped even further. It did and he did.
Perhaps with selling his stock, Dr. Kosinski could have argued that he didn’t know better. But doing the second trade in options adds a level of scienter. That’s probably why the DOJ brought criminal charges on top of the SEC’s civil case.
Sources:
- SEC Charges Stockbroker and Friend With Insider Trading
- SEC Complaint
- SEC Charges Biotech Employee, Two Stockbrokers With Insider Trading on Nonpublic Information About Pharmaceutical Trials and Merger
- SEC Charges Cardiologist With Insider Trading on Confidential Drug Trial Developments
- SEC complaint
