A hedge fund insider-trading case has ensnared a former Food and Drug Administration official, one of the first criminal actions focused on how Wall Street gathers information from Washington.
Federal prosecutors on June 15 unveiled charges against a current and a former portfolio manager of hedge- fund firm Visium Asset Management, accusing them of trading on confidential government information about generic-drug approvals.
They allegedly received the tips from a former FDA supervisor, who after leaving the agency’s office of generic drugs allegedly obtained the information from an ex-colleague who still worked at the agency. The former supervisor pleaded guilty earlier this week in connection with the case. One of the fund managers also pleaded guilty earlier this month, prosecutors said.
Manhattan federal prosecutors also charged another former Visium employee with plotting to mismark securities in a fixed-income fund. The Securities and Exchange Commission also has filed civil cases against the four men.
“I am deeply saddened by today’s events,” said Visium founder Jacob Gottlieb. He declined to comment further on the allegations.
For several years, federal investigators have been scrutinizing communications between Washington research firms and Wall Street investors, looking for confidential government information exchanging hands.
But regulators and prosecutors have struggled to build cases because of problems obtaining evidence and unclear rules on what is considered confidential information.
The first was a settlement the SEC signed last year with a political-intelligence firm, Marwood Group. The SEC accused Marwood of not properly informing its compliance officers about instances when its analysts obtained potentially non-public information from government employees. The firm admitted to wrongdoing and agreed to settle for $ 375,000.
The SEC and Justice Department are pursuing a separate probe into an April 2013 leak of information from the Medicare and Medicaid agency to investors concerning a coming announcement that would benefit health-insurance firms.
The criminal charges in the Visium case touch off one of the most significant insider-trading cases brought by the office of Manhattan US Attorney Preet Bharara since an appeals-court ruling in 2014 made it more difficult for prosecutors to bring such cases. That ruling followed a string of more than 80 convictions and only one acquittal for the New York prosecutors in insider-trading cases. Officials in the office have privately said they have had to drop some investigations over the past year due to the ruling.
The case involving Visium focuses on the relationship between Sanjay Valvani, a current partner who specialises in pharmaceutical investments at the healthcare-focused fund, and former FDA official Gordon Johnston. Valvani, according to prosecutors from the Manhattan US attorney’s office, schemed to get inside information from Johnston about the FDA’s pending approval of generic-drug applications.
Valvani, 44 years old, has been placed on leave at the fund, said people familiar with the matter. He allegedly used the tips to trade on Momenta Pharmaceuticals and Sanofi in 2010, authorities said, making about $ 25 million in profits.
On June 15 afternoon, Valvani pleaded not guilty and was released on a $ 5 million bail package. His lawyer, Barry Berke, said in a statement: “Sanjay Valvani is an innocent man whose investment decisions were always based on rigorous and entirely appropriate research and analysis, consistent with his high integrity.”
A lawyer for Johnston, who is 64 and pleaded guilty to wire and securities fraud, declined to comment.
The connection with the former FDA official began in the mid-2000s, according to court documents, when Visium and Valvani retained Johnston as a consultant to provide information on the likelihood the FDA would approve generic-drug applications.
In 2009 and 2010, the SEC said, Johnston learned through “indirect” and “triangulating” questions to a former colleague that the FDA was likely to approve a generic application for the drug enoxaparin, which he passed on to Valvani. Momenta, a generic-drug manufacturer, sought approval to make the drug, which is an anticoagulant; Sanofi made and sold Lovenox, the brand-name version of the drug.
At the time, Johnston worked for a generic-drugs industry association, and the former colleague believed Johnston would use the information in the context of his employment there, the SEC said.
Valvani also passed on the tip to his colleague, Christopher Plaford, who also traded on the information and netted $ 26,000 in profit, the SEC said. Plaford separately obtained confidential information in 2013 about certain impending cuts to Medicare reimbursement rates from another political consultant who used to work at the agency overseeing the program, netting $ 286,000 in related trades, authorities said.
Plaford pleaded guilty on June 9 to securities and wire-fraud charges. His lawyer declined to comment.
Valvani told Johnston in January 2011 that Visium was ending its relationship with the consultant “in the wake of news reports of insider trading investigations,” according to the indictment. Johnston was paid a total of $ 108,000 in 2009 and 2010.
Prosecutors and the SEC separately accused former Visium portfolio manager Stefan Lumiere, 45, with scheming with Plaford to mismark securities in a fixed-income fund, inflating asset values of the fund and overstating its liquidity.
Lumiere appeared in court on June 15, but did not enter a plea. His lawyer, Eric Creizman, said his client has maintained his innocence in conversations with the government over the last two years and will continue to do so. Lumiere was released Wednesday on a $ 1 million bail package.
This article was published by The Wall Street Journal