Ah, insider trading. It's the province of Wall Street types in really expensive shirts, right? Like in the movies? Well, read on.
Even the most clueless know that you're not supposed to trade on material nonpublic information, and the only really fuzzy part is what constitutes material information. A lawyer once told me that if you're an employee of a company, material information is "anything that makes you think about trading the stock". That's a pretty intelligent rule, and one that the recent Matrixx Supreme Court decision would seem to have reaffirmed. If someone could think it's nonpublic material information, odds are that it is.
In the drug business, the hottest potatoes in this category are the results of clinical trials and FDA decisions. People (a very short, well-defined, and well-paperworked list of people) inside a given company know the first news before anyone else, and people inside the FDA get to hear about the second. And there is no way that you can act on such information legally before it's released. Those tempted to try realize that, of course, and act accordingly.
They do, in fact, what Cheng Li Yiang (a chemist, regrettably) and his son Andrew Liang were accused yesterday of doing since 2006: they used the accounts of at least least seven other people to trade on knowledge of FDA approval decisions, pulling in over three million dollars in the process. The single biggest winner (over $1 million) appears to have been front-running the surprise approval of Vanda Pharmaceutical's Fanapt in 2009. It wouldn't surprise me if this was the one that blew up the whole business. That was such an unexpected move by the FDA (after which the stock went up by a factor of six) that the SEC must have gone back and carefully checked to see if anyone had been building up a position beforehand.
Liang got in on most of the big percentage moves of the last few years: Mannkind, Momenta, Pharmacyclics and many others, all small companies whose stocks saw some major action in both directions. If you want more details, here's the SEC complaint (PDF). It's a blueprint for getting caught, I should add. The various friend-and-family brokerage accounts mostly listed Liang's phone numbers as contact information, and almost always transferred money to an account held by Liang and his wife. The trading was done (one account right after the other) from IP addresses associated with his home account or voice lines billed to his name - this for accounts like the one ostensibly held by his 84-year-old mother back in China. Honestly, ten minutes after the SEC got suspicious about this guy and started checking him out, they must have known that they had him by the valuable body parts. It was really just a matter of time - well, time and greed.
Interestingly, Liang worked for the FDA for ten years before he seems to have decided to cash in. It would be interesting to know what went on, but my guess is that it's a familiar story. I think that he watched these decisions being made, watched the stocks jump around, thought about the profits to be made, and didn't act on those desires. Until one day he finally did - and nothing happened. So he probably told himself that he got away with it that time, and really shouldn't do that again for fear of getting caught - until he did it again, and didn't get caught. By this time, from the accounts you read of people in such situations, the hook is well and truly set. There may be a few people who are philosophical enough to take a set amount of money and walk away, but I'll bet that they're mighty scarce compared to the number of people who can't keep themselves from riding the train until, to their surprise, it suddenly pulls into a station.