Doctors Settle SEC Insider Trading Charges

by Dorsey & Whitney LLP
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The Commission filed two settled insider trading cases against medical practitioners who traded while in possession of material non-public information regarding clinical trials for a drug. SEC v. Lama, Case No. 5:14-cv-00996 (C.D. Cal. Filed May 19, 2014); SEC v. Chu, Case No. 5:14-cv-00995 (C.D. Cal. Filed May 19, 2014).

Defendants Daniel J. Lama and Franklin M. Chu are medical doctors doing business under the name San Bernardino Urological Associates Medical Group Inc. or SBUA. In early 2011 GTx Inc., a biopharmaceutical company, entered into a series of Clinical Trial Agreements with SBUA for the Phase II clinical trials of a prostate cancer drug. Dr. Chu was the lead investor on the trials. Dr. Lama served as an investigator. Under the agreements GTx paid SBUA for each patient it enrolled in the study.

On February 17, 2012 executives at GTx spoke with the FDA. During that telephone call the FDA stated that it was placing an immediate hold on the clinical trials for the prostate drug. After the call firm executives notified doctors and medical practices participating in the clinical trials so that patients could be taken off the drug – there were reports of an increased risk of blood clots in patients using it.

In the early afternoon of February 17 GTx left a voice mail for Dr. Chu. He returned the call later that afternoon and was told about the hold. Dr. Chu completed the call and logged on to his computer. He sold 16,000 shares of GTx stock held in three accounts, yielding proceeds of $93,120.

In mid-afternoon of the same day GTx spoke by telephone with SBUA’s Research Coordinator, informing her of the FDA hold. Dr. Lama’s wife, who was at the clinic, was informed about the hold and told her husband who was out of the office. In a series of subsequent telephone calls that afternoon Dr. Lama, who did not have access to a computer, had his wife sell 5,400 shares of GTx he held in a retirement account. The sales yielded proceeds of $31,428.

On February 21, 2012 GTx issued a press release, prior to the opening of the market, announcing that the FDA had placed a hold on clinical trials for the prostrate drug. GTx shares closed down over 36%. As a result Dr. Lama avoided possible trading losses of $11,502 while Dr. Chu avoided losses of about $34,081. When contacted by the Commission staff investigating the matter Dr. Lama initially provided false information, claiming he had no knowledge of the FDA hold at the time he sold the shares. The complaint against each Doctor alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b).

Each defendant settled the charges with the SEC. Each Doctor consented to the entry of a permanent injunction based on the Sections cited in each complaint. In addition, Dr. Chu agreed to pay disgorgement of $34,081, prejudgment interest and a penalty equal to the amount of the disgorgement. Dr. Lama agreed to pay disgorgement of $11,502, prejudgment interest and a penalty of $34,506 which is three times the amount of his illicit trading profits.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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