The SEC’s Insider Trading Case Against a Clinical Trial Physician: Lessons For Physicians, Investors, and Public Companies

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On November 2, 2010, the Securities and Exchange Commission (“SEC”) brought an action for insider trading against a physician involved in an investigational drug clinical trial based on the alleged use of confidential information about the clinical trial disclosed by the physician to a hedge fund portfolio manager. The U. S. Department of Justice (“DOJ”) also initiated parallel criminal proceedings for securities fraud based on the same allegations. The charges by the agencies reflect a more aggressive response by the SEC and other federal law enforcement agencies to alleged acts of insider trading as well as a new focus on the growing number of medical professionals that act as consultants to Wall Street investors. As a result, if the SEC and DOJ are successful, the case could have significant implications for: (1) hedge fund managers and other investors working with consultants from the medical community; (2) pharmaceutical and medical device manufacturers testing new products in clinical trials; and (3) physicians and other third parties involved in the conduct of clinical trials. Even if the SEC and DOJ are not ultimately successful, the existence of the case warrants a reconsideration of relationships among investors, manufacturers and third parties involved in clinical trials.

Summary of the Charge and Supporting Allegations

A French physician, Yves M. Benhamou, M.D., was charged with unlawfully providing confidential information regarding disappointing clinical trial results to a hedge-fund portfolio manager. The charge is based on allegations related to the physician’s involvement as a consultant and lead investigator for clinical trials conducted by Human Genome Science, Inc. (“HGSI”). The clinical trials involved a new drug then known as Albuferon that HGSI was developing for the treatment of chronic hepatitis C. According to the allegations, Dr. Benhamou was a member of a five person steering committee overseeing the Albuferon clinical trial. The physician was also the “country lead investigator” for France and other parts of Europe. While acting in these capacities, Dr. Benhamou was also retained as a consultant by a portfolio manager, who was managing portfolios of health care hedge funds that, during the relevant period, were collectively long approximately six million shares of HGSI. Dr. Benhamou allegedly alerted the portfolio manager about a setback in the clinical trial. This “tip” occurred several days before HGSI’s public announcement of the issues with the trial. In response to the tip, the hedge funds allegedly sold their HGSI positions, avoiding nearly $30 million in losses.

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