Recent Insider Trading Case Sparks Concerns Over Leaked Clinical Trial Results

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What you need to know:

The Martoma insider trading case is the latest in, and largest of, a string of actions brought by the Securities and Exchange Commission related to the alleged misuse of confidential clinical trial information by life sciences companies and third parties with access to this information.

What you need to do:

For life sciences and other public companies, use the Martoma case as an opportunity to evaluate insider trading policies and training programs, and to update agreements with third parties having access to clinical trial or other confidential information, all to mitigate the risk that these data are leaked prior to their publication or public disclosure.

Clinical Data are Under the Enforcement Microscope

As investors look to advances in biopharmaceutical companies’ product pipelines as drivers of future growth, information regarding clinical trials of new drugs can have material consequences on the value of these companies’ securities.  Consequently, the Securities and Exchange Commission is engaged in an initiative to track the provenance and use of confidential data about clinical trials, and has partnered with the Food and Drug Administration to evaluate the veracity of clinical trial information reported by biopharmaceutical companies.  This initiative has resulted in many high-profile enforcement actions, and biopharmaceutical companies have increasingly found themselves embroiled, either directly or indirectly, in significant insider trading cases involving leaked clinical trial results.

US vs. Martoma

The most recent of these cases has been dubbed “the most lucrative insider trading scheme ever.”  In November, the SEC formally charged Mathew Martoma, a portfolio manager at a hedge fund affiliated with SAC Capital Investors, and his employer for their role in a $276 million scheme involving the leak of clinical trial data for an investigational drug for Alzheimer’s disease being developed by Wyeth (now Pfizer) and Elan Pharmaceuticals.  Specifically, the SEC alleges that Dr. Sidney Gilman, the physician overseeing the clinical trial, tipped off Martoma about the drug’s disappointing clinical trial performance and that Martoma, acting on the information, convinced his firm to liquidate its position in Wyeth and Elan securities, ultimately resulting in a $960 million sell-off.

Gilman, a professor at the University of Michigan Medical School, served as a consultant to Wyeth and Elan as well as a consultant for a Manhattan-based “expert network firm.”  Martoma allegedly gained material, non-public information about the Alzheimer drug’s negative trial results from Gilman after they developed a relationship following their introduction by the expert network firm.  Although Martoma denies any wrongdoing, Gilman has agreed to pay more than $234,000 to settle charges against him.

Seize the Opportunity to Mitigate the Risk of Disclosure

While Pfizer and Elan have not been, and may never be, charged for any wrongdoing in the Martoma case, companies linked to third party insider trading cases invariably suffer from the management distraction, external expense and reputational harm associated with them.  While publicly-traded biopharmaceutical companies generally have robust insider trading policies and training programs for their employees, there are additional steps that can be taken to mitigate the risk associated with data leaks from the broader network of individuals who may have access to these data, thus creating a record to demonstrate to regulators that diligence has been used in seeking to prevent these leaks from occurring.  These steps include:

  1. Taking inventory of all third parties who are likely to have access to clinical trial information during the life of all ongoing clinical trials and verifying that each party has signed an agreement containing clear and well-drafted confidentiality provisions.  These third parties include clinical trial sites, clinical research organizations, data management vendors, members of data monitoring committees, contracted biostatisticians and vendors conducting central reviews of patient data and testing patient samples.
  2. Using the publicity surrounding the Martoma case as an opportunity to send a letter to these third parties reminding them of their obligations under insider trading laws.
  3. Amending template contracts used with these third parties to include the following additional safeguards for future clinical trials:

    •  acknowledgement by the third party that access to clinical trial data may qualify individuals with such access as “insiders” within the meaning of federal securities laws, and that trading in company securities is prohibited until such data are disclosed;
    •  if the third party is a business entity or medical institution, a representation that the entity or institution has appropriate compliance and training programs for its employees and staff regarding insider trading;
    •  disclosure of all ownership of company securities by the third party (or its employees who may have access to clinical data);
    •  disclosure of any relationships that the third party (or its employees who may have access to clinical data) has with members of the financial industry in order to facilitate further investigation into these relationships.

    If a third party is engaged for a future trial under a previously-executed contract, these provisions should be included in a work order or similar document so the third party is bound in connection with that future work.
  4. Including a module regarding compliance with insider trading laws in site initiation visits at clinical trial sites, investigator meetings, and in “kick-off” meetings with key vendors or advisory boards, in order to reach the broadest possible audience, and documenting that this information was discussed.