Wall Street Journal
Alicia Mundy
Brent Kendall
WASHINGTON-A longtime chemist at the Food and Drug Administration was charged Tuesday with insider trading by federal authorities, who alleged he made as much as $3.6 million trading drug company stocks based on confidential drug-approval information.
The Securities and Exchange Commission filed civil charges against Cheng Yi Liang, 57, an FDA employee since 1996, alleging he illegally traded in advance of at least 27 different FDA announcements involving 19 publicly traded companies.
The Justice Department filed related criminal charges and also charged Mr. Liang’s son, Andrew Liang, in the case. Both are residents of Gaithersburg, Md.
The charges stunned the FDA. Mr. Liang works in the division in charge of approving new drugs, the agency’s most visible and sensitive role. The pharmaceutical industry has long worried about security in this area, given how much secret corporate information is shared with employees at the agency.
“This is the kind of stuff I lost sleep over,” said former FDA commissioner David Kessler, because pharmaceutical companies and Wall Street depend on FDA officials never using their proprietary knowledge “to play the market.”
The SEC and the Justice Department said the men traded shares dating back to 2006 of companies whose drugs were used for colon cancer, schizophrenia, insomnia, severe constipation, osteoarthritis and heart disease.
Some of the FDA announcements at issue involved delays in the approval process due to the drugs’ safety or efficacy tests. Mr. Liang allegedly bought stock for profit before positive announcements, bet on shares falling after negatives ones and sold shares to avoid losses.
Mr. Liang traded stocks of smaller companies developing new drugs, rather than major corporations, to take advantage of the relatively larger swings in these firms’ stocks, the SEC said. The SEC said he went to great lengths to conceal his trading-which was financed in part with a home-equity line of credit-using seven brokerage accounts that weren’t in his name. One belonged to Mr. Liang’s 84-year-old mother in China, the SEC alleged.
In the most profitable transaction, the Liangs allegedly traded ahead of a May 2009 announcement by Vanda Pharmaceuticals Inc. that its schizophrenia drug Fanapt had received FDA approval. They netted more than $1 million on the trades, government lawyers alleged.
Another of the companies whose stock he allegedly traded was Momenta Pharmaceuticals Inc., a small biotechnology company from Cambridge, Mass., which was vying with two other companies to make a generic version of the blockbuster blood thinner Lovenox.
The FDA unexpectedly told the companies in November 2007 that they needed to do further testing, holding up the approval process. The SEC claimed Mr. Liang made $130,000 by trading shares a day before the news was made public, cutting Momenta’s stock nearly in half.
When the drug was finally approved, in July 2010, Mr. Liang made another $85,000 buying shares three days ahead of the announcement, the SEC alleged.
Momenta’s chief executive, Craig Wheeler, said the company had no comment, and hoped to soon review the SEC complaint.
SEC investigators don’t believe Mr. Liang is part of a wider insider-trading ring, said a person familiar with the matter. But agency officials are checking to see if other FDA employees have been abusing market-moving information.
The FDA said Tuesday it is aware of the insider-trading charges. “The agency is cooperating fully with the authorities, and will review the situation and take any appropriate action,” its written statement read.
Neither the Liangs nor their attorneys could be reached for comment.
The Justice Department said Mr. Liang’s position at the FDA gave him access to the agency’s password-protected tracking system used to manage drug applications and drug-safety issues. That allowed Mr. Liang to review documents as they passed through the FDA approval process.
Mr. Liang’s last completed transaction in the alleged insider-trading scheme involved Clinical Data Inc., which received FDA approval in January for the antidepressant Viibryd.
According to court documents, officials with the Department of Health and Human Services’ inspector general’s office installed software on Mr. Liang’s work computer that collected screen shots showing how he accessed the tracking system to follow Viibryd matters, including a document recommending approval of the drug.
Over several days, Mr. Liang bought more than 46,000 shares that he sold for a $380,000 profit after the drug was approved, the government alleged.
