USAO, SEC Charge Insider Trading Based on FDA/CMS Information

The Manhattan U.S. Attorney’s Office and the SEC continued their war on insider trading with additional actions against portfolio managers. In their most recent cases they allege that the two traders obtained inside information from consultants who retained contacts that supplied the information from their former employer, the Food and Drug Administration and the Centers for Medicare and Medicaid Services. SEC v. Valvani (S.D.N.Y. Filed June 15, 2016);

Valvani names as a defendant Sanjay Valvani, a partner at an Investment Adviser and a portfolio manager with trading authority over a portion of the Balanced Fund. Also named as a defendant is Gordon Johnston, formerly an employee of the FDA and, more recently a consultant to the Investment Adviser and a Vice President for the Generic Drug Trade Association.

By 2005 there was considerable speculation as to whether the FDA would approve any of exnoxaparin Abbreviated New Drug Applications or ANDA. Investment Adviser hired Mr. Johnston to advise Mr. Valvani on the issue. Accepting that position was contrary to the policies of the Trade Association where he was employed. The Association required that he work full time.

While there was little movement on the applications for years, by 2009 Mr. Johnston learned from a long time friend at the FDA that an enoxaparin ANDA was moving toward approval. Mr. Johnston obtained the information in confidence and did not disclose his role as a consultant to a hedge fund. Nevertheless, he informed trader Valvani. Both recognized the significance of the information. Trader Valvani had the Fund take a long position in Momenta Pharmaceuticals, Inc. and a short position in Sanofi S.A in late July 2010 despite the fact that the policies and procedures of the Investment Adviser precluded trading on inside information. When the FDA announcement was made the Fund had realized and unrealized trading profits of about $24.8 million.

Later in 2010 Mr. Johnston learned that another enoxaparin ANDA application would be approved. Mr. Valvani used this information to formulate a trade for the Balanced Fund to sell the shares of Momenta short. When Watson Pharmaceuticals, Inc. announced in mid-September 2011 that its ANDA application had been approved by the FDA the Fund had realized and unrealized profits of about $7 million. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Section 204A. The action is pending.

Plaford names as a defendant Christopher Plaford, a partner at Investment Adviser and a portfolio manager for the Credit Fund. He also managed a portion or “sleeve” of assets in the Balanced Fund. Between March 1, 2010 and July 23, 2010 Mr. Plaford traded profitably on behalf of the Credit Fund in credit default swaps linked to Sanofi, betting that the firm’s revenues and creditworthiness would decline when the FDA approved a generic drug that would compete directly with Sanofi’s Lovenox. The trade resulted in profits of about $26,000. The information came from Mr. Johnston. Mr. Plaford knew that ultimately the information came from an FDA official who had furnished it to consultant Johnston.

Three years later, on May 30, 2013, Mr. Plaford learned from a paid Political Consultant that CMS was expected to propose a cut to the Medicare reimbursement rates for certain home health service. The next day Mr. Plaford caused Investment Adviser to enter into an advisory services agreement with Political Consultant’s firm. Two weeks later Political Consultant informed Mr. Plaford that CMS would in fact propose a rate cut. He understood the information came from a CMS official. After receiving the information Mr. Plaford adjusted certain positions for the Credit Fund and Balanced Fund based on the information. Following the announcement the two funds had profits of $285,000.

Mr. Plaford, along with another portfolio manager, Stefan Lumiere, manipulated the valuation procedures of the advisory firms for Credit Fund, using sham broker quotes to mismark securities held by the it. As a result, the valuations at month end of the securities held by the Fund were inflated; the NAVs were inflated; Credit Fund overstated its reported month-end and annual performance; and certain distressed assets held by the Fund were misclassified. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2), 206(4) and 204A. The case is pending. See also SEC v. Lumiere (S.D.N.Y. Filed June 15, 2016)(action against Mr. Lumiere based on the mismarking scheme described above; the complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4)).

The U.S. Attorney’s Office for the Southern District of New York filed parallel criminal actions.

Tagged with: , ,