SEC Hands Out Insider Charges to Fund Managers and Former Govt Official

The U.S. Securities and Exchange Commission (SEC) recently announced insider trading charges against two hedge fund managers and their source, a former government official accused of deceptively obtaining confidential information from the U.S. Food and Drug Administration (FDA).

Separately, a third hedge fund manager working at the same investment advisory firm as the alleged insider traders was charged with falsely inflating assets in portfolios he managed.

The agency alleged that Sanjay Valvani reaped unlawful profits of nearly $32 million for hedge funds investing in health care securities by insider trading on tips he received from Gordon Johnston, who worked at the FDA for a dozen years and remained in close contact with former colleagues while working for a trade association representing generic drug manufacturers and distributors.

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Johnston concealed his separate role as a hedge fund consultant and obtained confidential information about anticipated FDA approvals for companies to produce enoxaparin, a generic drug that helps prevent the formation of blood clots. He allegedly funneled details of his conversations with FDA personnel to Valvani, including a close friend he mentored during his time at the agency. Valvani then traded in advance of public announcements concerning FDA approvals for such companies as Momenta Pharmaceuticals, Watson Pharmaceuticals and Amphastar Pharmaceuticals.

Andrew J. Ceresney, director of the SEC’s Division of Enforcement, commented:

We allege that Valvani’s formula for trading success was tapping Johnston to abuse his position of trust as a generic industry representative to the FDA and underhandedly obtain confidential information from his friends and former colleagues at the FDA. Valvani and his hedge funds made millions by trading on nonpublic FDA drug approval information not available to the rest of the stock market.

The SEC further alleged that Valvani in turn tipped fellow hedge fund manager Christopher Plaford, who is charged in a separate complaint with insider trading on this nonpublic information as well as other material he received confidentially from a former Centers for Medicare and Medicaid Services official about an impending cut to Medicare reimbursement rates for certain home health services. Plaford allegedly made roughly $300,000 by trading based on inside information in hedge funds he managed.

In a separate complaint against Stefan Lumiere, the SEC alleged that he and Plaford engaged in a fraudulent scheme to falsely inflate the value of securities held by a hedge fund advised by their firm. For an 18-month period, Lumiere used sham broker quotes to mismark as many as 28 securities per month, surreptitiously passing his desired prices along to brokers via his personal cell phone or a flash drive delivered by a courier. Consequently, the fund reported artificially inflated returns and monthly net asset values, and paid out more than $5.9 million in inflated management and performance fees to its investment adviser.

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In parallel actions, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Valvani, Johnston, Lumiere and Plaford. The SEC’s complaints, filed in federal court in Manhattan, seek disgorgement of ill-gotten gains plus interest and penalties, as well as permanent injunctions against future violations.