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
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
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
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
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.
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.
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.
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