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Insider Trading and Clinical Trials

Jesse C. Vivian, RPh, JD
Professor, Department of Pharmacy Practice
College of Pharmacy and Health Sciences

Wayne State University
Detroit, Michigan



2/20/2013

US Pharm
. 2013;38(2):43-46.

Insider trading is one of those activities we know should be avoided. It is illegal and unethical. But just what it is and how the prohibition against it works is harder to explain and understand. In its simplest terms, insider trading is the purchase or sale of corporate stocks or securities (e.g., bonds, stock options) by individuals with access to confidential information that could affect the price of the stock where that information is not available to the general public.1 However, to complicate things, corporate insiders (e.g., officers, key employees) may trade stocks they own in the corporation as long as they do so in a way that does not take advantage of nonpublic information. In other words, the timing of the trades by insiders may determine whether it is illegal or not. Most health care professionals never have the opportunity to illegally gain monetary or other benefits from insider training. Yet it can and does happen. Here is one story of how disclosure of confidential information can cause huge problems when prohibitions against the practice are ignored.

Facts of the Case

Eighty-year-old Sidney Gilman, MD, was a highly regarded neurologist at the University of Michigan. He was chairman of the neurology department at the medical school from 1977 to 2004. Following this appointment, he became associate director of the Michigan Alzheimer’s Disease Research Center at the university. His resume lists over 400 published scientific papers. In 2011-2012, his annual base salary was $258,000. He supplemented that income for several years with more than $100,000 annually in consulting fees earned from Wall Street investors who relied on his information. They also provided him with private jets, limousines and drivers, and stays at luxury hotels, and paid him a fee of $1,000 per hour for his time and opinions on many drugs in various phases of clinical trials. This lavish lifestyle apparently went on for about 20 years. At one time, Dr. Gilman consulted with over 40 clients. He attended or participated in 50 to 100 professional meetings each year, collecting approximately $1,000 for each meeting. His forced retirement came amid revelations that he had participated in a large-scale, insider-trading scheme.2,3

Dr. Gilman was charged with conspiracy after allegedly disclosing the results of an Alzheimer’s drug trial to a prominent hedge fund stock trader before the study was made public. The trader, Matthew Martoma, was charged with using the insider information to reap huge profits in violation of Securities and Exchange Commission (SEC) regulations. Federal prosecutors claim Mr. Martoma is at the center of a scheme described as one of the most lucrative insider-trading cases in history. He sold over $700 million in stocks and bonds in two companies that were conducting clinical drug trials being investigated by Dr. Gilman in 2008. Mr. Martoma allegedly earned a net profit of $276 million from trading on the insider information.3

In November 2012, Dr. Gilman agreed to pay back $234,000 of the consulting fees he earned in a plea deal agreement to avoid being prosecuted. He is cooperating with the FBI, SEC, and Department of Justice in the criminal lawsuit against Mr. Martoma.3

Background

Mr. Martoma and Dr. Gilman began collaborating on drug investigations as early as 2006. They were introduced through an expert-witness networking company, Gerson Lehrman, which specializes in facilitating communications with leading researchers and stock-trading entities. At the time, Dr. Gilman was investigating bapineuzumab, a drug under development, and was chair of the review board overseeing the investigation. The drug was in phase III clinical trials in 2008. Bapineuzumab is a humanized monoclonal antibody that acts on the nervous system and was, at the time, believed to have potential therapeutic value for the treatment of mild-to-moderate Alzheimer’s disease and possibly glaucoma. By 2012, it was finally established that the drug had failed to produce significant improvements in patients in two major trials. The manufacturers have decided to cease their investigation.4

In July 2008, Dr. Gilman presented the results of the clinical trial on bapineuzumab to a packed audience in a Chicago convention hall at the International Conference on Alzheimer’s Disease.3 As his talk progressed, it became evident that the drug was not as effective as its manufacturers, Wyeth (now Pfizer) and Elan, had hoped. Twelve days before the speech, Dr. Gilman had e-mailed a copy of his presentation notes to Mr. Martoma. The trader initiated the transactions at the center of this controversy before the public presentation, thus saving his firm (SAC Capital) losses of millions of dollars on the stock prices of the two pharmaceutical companies, which went down in value after the presentation. The billionaire owner of SAC Capital, Steven Cohen, is under investigation but has not yet been charged with the insider-trading activity associated with this case.3

Mr. Martoma was arrested in November 2012 on insider-trading charges after Dr. Gilman agreed to cooperate with federal agents to avoid prosecution. Mr. Martoma and Dr. Gilman had met on 42 different occasions to discuss the clinical investigations the doctor was either conducting himself or was familiar with. These frequent meetings ceased in 2008 when the FBI began the insider-trading investigation. Dr. Gilman, however, continued consulting with Gerson Lehrman until as late as 2012.3

In addition to his relationship with Mr. Martoma and SEC Capital, Dr. Gilman also sat on a scientific advisory board for Pequot Capital, a different Wall Street investor that was also interested in the two clinical trials being conducted under his watch. The company also built up a significant number of shares in Wyeth and Elan stocks worth over $45 million. Pequot sold these holdings in 2007. The company went out of business in 2010 after admitting it had engaged in insider-trading activities with different researchers.3

After his resignation, the University of Michigan issued a statement saying that all ties with Dr. Gilman had been severed due to his illegal and unethical behavior. Since then, the doctor has remained in seclusion at his home in Ann Arbor, Michigan, refusing any interviews with reporters.3

Analysis

Insider trading occurs when someone has material confidential information unavailable to the general public and uses that information to trade stocks or bonds in order to make significant monetary gains (or avoid losses). The premise is that it is not fair for the one who has the inside information to make investment decisions based on data not available to others.

In this case, Dr. Gilman was conducting clinical trials on drugs being developed by large pharmaceutical manufacturers. This gave him insight into the value of these drugs that others not involved with the trials were not privy to. Researchers are entrusted to keep the results of drug studies confidential until the agencies or companies sponsoring the research decide to make the information public. The duty of confidentiality is usually contained in the contractual agreements between the sponsor and the researchers. Dr. Gilman violated this trust by disclosing the results of his studies to a stock trader before those results were made public. This gave the trader the unfair advantage of knowing how the stock prices in the companies sponsoring the research would be affected after the information was released to the public. Here, that information resulted in gains of millions of dollars.

Unfortunately, this is not an isolated incident. The Gerson Lehrman group responsible for connecting Mr. Martoma with Dr. Gilman is one of about 40 companies that exist to pair researchers and stock traders.5 Gerson Lehrman lists approximately 35,000 “expert” researchers, most of whom have ties to academia, among its members. Since 2009, the SEC has launched probes into whether these “expert networks” are actually trafficking insider information. These investigations have led to charges against nearly 30 people with connections to expert networks.5 The SEC is continuing to find new targets, particularly in the health care industry. This highlights the tightrope that researchers walk when they consult for the financial industry.

Pharmacists are often involved in research to one degree or another, but especially in those connected to clinical trials. This activity can yield insider information that may well be valuable to others. Someone from a financial institution who tries to talk to researchers with access to this information is likely probing for insider data. Thus, researchers must be constantly on guard to not talk to folks seeking proprietary infor-mation. The money they pay to researchers may be attractive and the information they solicit might appear to be innocuous, but as demonstrated by this case, inappropriate disclosures may lead to problematic situations.

REFERENCES

1. Insider trading. U.S. Securities and Exchange Commission. www.sec.gov/answers/insider.htm. Accessed January 15, 2013.
2. Biolchini A. Sidney Gilman, U-M medical professor in midst of insider trading scheme, retires. AnnArbor.com. November 28, 2012. www.annarbor.com/news/sidney-gilman-u-m-medical-professor-in-midst-of-insider-trading-scheme-retires/. Accessed January 15, 2013.
3. Popper N, Lasic B. Quiet doctor, lavish insider: a parallel life. NY Times. December 15, 2012. www.nytimes.com/2012/12/16/business/sidney-gilmans-shift-led-to-insider-trading-case.html?pagewanted=all&_r=0. Accessed January 15, 2013.
4. Securities and Exchange Commission, Plaintiff, against CR Intrinsic Investors, LLC, Matthew Mortoma, and Dr. Sidney Gilman, defendants. U.S. District Court Southern District of New York. November 20, 2012. www.sec.gov/litigation/complaints/2012/comp-pr2012-237.pdf. Accessed January 15, 2013.
5. Ledford H. Insider trading sparks concerns. Nature. January 11, 2013. www.nature.com/news/insider-trading-sparks-concerns-1.12200. Accessed January 15, 2013.

To comment on this article, contact rdavidson@uspharmacist.com.

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