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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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« Small Molecules Slipping Off the List | Main | What's A Phenotypic Screen, And What Isn't? »

November 20, 2012

Easy Money, Right?

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Posted by Derek

Public biopharma companies have to put in a lot of effort to safeguard sensitive information. Since we have so many big, important binary events in our business (clinical trial results, sales figures for individual drugs, and so on), you really have to keep that stuff from getting out and around.

Which means that there's also a strong incentive for such things to leak. One could do very well for one's self, if one were not so concerned with being forced to disgorge all of one's profits, and even spending one's time in the slammer. And those factors completely neglect one's sense of ethics, assuming that one has any. These concerns are brushed aside strictly on a risk basis, one understands:

John Lazorchak, 42, director of financial reporting at Celgene, regularly tipped others to nonpublic information on acquisitions, quarterly earnings results and regulatory news, according to a Federal Bureau of Investigation complaint filed yesterday in federal court in Newark, New Jersey.
Mark Cupo, 51, the director of accounting and reporting at Sanofi-Aventis, now known as Sanofi; and Mark Foldy, 42, a marketing executive at Stryker Corp., also were charged. Prosecutors said most of the profit went to Lawrence Grum, 48, and Michael Castelli, 48, who also tipped friends and family. The case involves two sets of high school friends and at least one witness who secretly recorded Grum for the FBI.

Oh, dear. The total profit, in this instance, is about $1.5 million, and standards vary, but even if I had ethical problems I wouldn't run such risks for a share of that amount. Or the full amount, either. But as this Bloomberg story details, insider trading seems to have become a rather more democratic activity over the years, and the amounts of money involved have changed accordingly. Perhaps the people involved are thinking that these sums are too small to be noticed, by the standards of Wall Street and the SEC, and that they'll have a better chance of getting away with the trades.

Not so. I knew someone once who was having a dispute with the IRS, and was (by my standards) insufficiently concerned about his situation. "I'm just a little guy", was the response, "they don't care about someone like me". What I told him was "Whales eat plankton, you know". In that spirit, that second link gives the grim details of a case involving an employee at Seattle Genetics, and it could serve as the template for many others like it. It's a sad story. Most of them are.

Comments (14) + TrackBacks (0) | Category: Business and Markets | The Dark Side


COMMENTS

1. RB Woodweird on November 20, 2012 9:06 AM writes...

If I had fewer scruples and more time on my hands and some money to back it up, here is what I would do in this area. I would set up a biotech/pharma investment company and hire psychologists and private investigators. Then we would target firms approaching big binary events such as are mentioned above and the executives of those firms who would be the ones to find out about the results in advance of public release. My teams would observe these principals using entirely public and legal data - social network interaction, behavior of the targets in public, etc. - to establish baselines and reactions to any personal or business successes other than the binary events.

Then, when the clinical data is obtained, we again observe the principals for a time and sit down with all that data to determine if the results were positive or negative based only on our observations of public behavior and go long or short on the stock.

Would that constitute insider trading?

Permalink to Comment

2. Hap on November 20, 2012 9:48 AM writes...

These guys haven't seen "Bambi meets Godzilla", right?

If you're an enforcement agency, you have to regularly prove your worth in catching people or the people who pay you wonder why you're there. Big cases make big news, but the defendants generally have big money and big lawyers, and so the outcomes are not always certain. If you catch lots of little fish, though, they are less likely to have big lawyers, and so evidence is probably more easily obtained and accepted and restitution taken. They could form a "base load" for the enforcement agency. So, when someone says that they're a small fish for an enforcement agency, they should consider themselves what the agency eats daily. Only rarely does the SEC get to feast on grilled CEO and chilled CFO - most times, it eats loaf of Joe Blow.

Permalink to Comment

3. Hap on November 20, 2012 10:22 AM writes...

Considering their jobs had to be netting them over $100K apiece, and they likely wouldn't hired to do their jobs anywhere if they got caught, they must have thought that the chance they'd be caught was < 10%. Unfortunately, that's sort of plausible, thought since we don't know how many people tried and succeeded, we can't be sure. Considering the measures that trading companies have to safe trades (in the Bloomberg article, TD didn't file trades that they thought were suspicious, probably because they represented such a high fraction of the total volume of trades), I wouldn't be certain that I could pull off those trades even if I weren't caught.

"Don't bet what you can't afford to lose" seems like a good motto here.

Permalink to Comment

4. Biotechtranslated on November 20, 2012 10:38 AM writes...

@Woodweird,

You may want to check this out:

dealbook.nytimes.com/2010/10/01/s-e-c-charges-railroad-workers-with-insider-trading/

A family was charged with insider trading and they allege that the only information they had was what they observed on the job: people in suits walking around.

I think the lesson is, you don't want the gov't to make an example out of you.

Mike

Permalink to Comment

5. anon on November 20, 2012 10:52 AM writes...

Yeah, i bet everyone who tanked the economy in 2008 is really staying awake at night, worrying when the SEC is finally going to charge them...

Permalink to Comment

6. My 0.02 on November 20, 2012 11:09 AM writes...

For every one of the insider trading case gets caught, there are probably a thousand cases or more out there going unnoticed. IMHO, making insider trading LEGAL is the only way to solve the problem. One of main arguments for that is if it is legal, as soon as a material information becomes available, in today's information age, it becomes public (through family, friends, Facebook, six-degree of separation, ...) in no time. There is no time gap. However, in the current system, there is a time gap between when a material information is produced/generated and when it is "publicly released". It is very tempting and and as a result hard to keep the information secret during that time gap period .

Permalink to Comment

7. RB Woodweird on November 20, 2012 12:24 PM writes...

@Biotechtranslated

Thanks for the link. My company would not be employees of any of the companies we are observing, though. Could it still be 'insider'?

Permalink to Comment

8. Biotechtranslated on November 20, 2012 12:47 PM writes...

@Woodweird,

Would it be insider trading if your employees don't work for the company in question? Logically no. But I wouldn't bet on logic with the SEC.

Mike

Permalink to Comment

9. bbooooooya on November 20, 2012 1:12 PM writes...

" My company would not be employees of any of the companies we are observing, though. Could it still be 'insider'?"

Yes. Any trading on material non-public information is illegal.

Permalink to Comment

10. Hap on November 20, 2012 1:24 PM writes...

9: I thought you had to have a duty to the people whose information it was - if you overhead stupid people from a company on an elevator discussing an upcoming deal, and you were not an employee of anyone involved, you could trade on the information because you were not violating a duty to your employers or shareholders (as anyone involved would be). (Someone brought this up on the last insider trading sonata).

"Material non-public information" could include being smarter than lots of other people, or new ideas that would impinge on someone else's business - if that's illegal, then there's really no point to playing in the market (or funding it).

Permalink to Comment

11. bbooooooya on November 20, 2012 2:23 PM writes...

" if you overhead stupid people from a company on an elevator discussing an upcoming deal, and you were not an employee of anyone involved, you could trade on the information because you were not violating a duty to your employers or shareholders"

I think you are correct: you may still have to prove this in court, which could take some time and be costly.

Permalink to Comment

12. Anonymous BMS Researcher on November 20, 2012 10:46 PM writes...

Back in August, a BMS executive was caught using information about companies we were planning to acquire, which knew about because his department did due diligence on possible deals. I generally learn such things when they become public.

This character seems to have been an example of How Not To Do It. Not only did he use BMS computers and a BMS-issued Blackberry to make trades from his office over the BMS network, but he also used his office computer to do Yahoo searches of how to avoid getting caught making insider trades. Sounds like Bart Simpson would have been more thoughtful, and Barney Fife could have caught him.

Permalink to Comment

13. Anonymous on November 21, 2012 2:48 PM writes...

Wow. See this link for detail on the brilliance of ABR's referenced inside trader.

I would forward the Mensa Society membership to whatever federal prison he ends up spending time in. You should probably leave a note asking him to avoid using crayon, though. I would also leave his name off the list of people to write potential scenarios for crime nights.

Permalink to Comment

14. Sisyphus on November 21, 2012 8:08 PM writes...

$1.5 million? That's all? I guess you need to be at Goldman-Sachs or cozy with the Barry Soetoro administration (think $green$ energy) to make the $Billions.

Permalink to Comment

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