The SEC and DOJ announced that a former official of the Food and Drug Administration and two hedge fund managers have been charged with insider trading ahead of FDA announcements approving the sale of generic drugs. One of the hedge fund managers and a third manager were also charged with perpetrating a scheme to use sham broker quotes to "mismark" securities held by a hedge fund, inflating its value and, therefore, management fees (SEC v. Valvani, June 15, 2016).
Insider trading scheme. According to the SEC’s complaint, a former deputy director of the FDA’s Office of Generic Drugs (OGD) and later vice president of the Generic Drug Trade Association (GDTA) tipped a portfolio manager of hedge funds that invested in healthcare securities about the FDA’s approval of certain generic drugs. The former FDA official had learned confidential information about the FDA approvals from a former colleague at the FDA. The former colleague considered the former official a close friend and mentor and believed that his discussions with the former official were confidential, the SEC alleged. Based on the tips from the former official, the portfolio manager reaped unlawful profits of $32 million for his hedge funds.
The SEC alleged that the former FDA official was hired by the portfolio manager’s firm to advise him about OGD’s pending reviews of the drug enoxaparin and was paid hundreds of thousands of dollars for his services, a fact which he concealed from his former colleague and from the GDTA. Despite his firm’s policy requiring its employees to alert its legal department or chief compliance officer if an employee came into possession of material nonpublic information and not to trade on that information, the portfolio manager repeatedly failed to do so, according to the SEC.
In addition, the portfolio manager also tipped a fellow hedge fund manager about the information learned from the former FDA official. This second manager had also received confidential information about an impending cut to Medicare reimbursement rates from a former Centers for Medicare and Medicaid Services official. This second manager traded on this information and made nearly $300,000 in the hedge funds he managed, the SEC alleged.
Mismarking scheme. Separately, the SEC also alleged that the second portfolio manager and a third portfolio manager at the same advisory firm manipulated the firm’s valuation procedures regarding a credit securities hedge fund (the Credit Fund), which they advised. They allegedly used sham broker quotes to mismark securities held by the Credit Fund by either mispricing them or overvaluing them. As a result, the Credit Fund reported artificially inflated returns and monthly net asset values. This meant that it paid out nearly $6 million in inflated management and performance fees to the advisory firm.
Civil and criminal charges. The SEC has charged the four individuals with securities fraud, including violations of the Investment Advisers Act. It is seeking disgorgement, penalties, and permanent injunctions. The SEC’s press release announcing the charges stated that the second hedge fund manager has cooperated with its investigation.
The U.S. Attorney’s office for the Southern District of New York also announced criminal charges against the four men for their roles in the insider trading and mismarking schemes. The U.S. Attorney’s Office issued a press release stating that the former FDA official and the second portfolio manager have agreed to plead guilty and are cooperating with the government.
Attorneys: Andrew M. Calamari for the SEC.
MainStory: TopStory FraudManipulation BrokerDealers Enforcement InvestmentAdvisers HedgeFundsNews NewYorkNews
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