The Securities and Exchange Commission today 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). 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 SEC alleges 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. 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. Johnston allegedly funneled to Valvani the details of his conversations with FDA personnel, 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.
“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,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “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 alleges 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 approximately $300,000 by trading based on inside information in hedge funds he managed. He has cooperated with the SEC’s investigation.
In a separate complaint against Stefan Lumiere, the SEC alleges 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. The fund consequently 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.
“Lumiere allegedly used fake prices to value assets while investors were led to believe the fund was using real prices from independent sources that reflected the market value for those assets,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “Financial professionals who cheat investors and game the system should not expect to get away with it.”
In parallel actions, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Valvani, Johnston, Lumiere, and Plaford.
The SEC’s complaint against Valvani and Johnston charges them with violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Valvani also allegedly aided and abetted his firm’s violation of Section 204A of the Investment Advisers Act of 1940.
The SEC’s complaint against Plaford charges him with violations of Section 10(b) of the Exchange Act and Rule 10b-5, and Section 206 of the Advisers Act and Rule 206(4)-8. He is also charged with aiding and abetting his firm’s violation of Section 204A of the Advisers Act.
The SEC’s complaint against Lumiere charges him with committing or aiding and abetting violations of Section 10(b) of the Exchange Act and Rule 10b-5 as well as Section 206 of the Advisers Act and Rule 206(4)-8.
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.
The SEC’s continuing investigation is being conducted by William Conway and Philip Moustakis of the Asset Management Unit and Jason Sunshine, Charles Riely, and Valerie Szczepanik of the New York office. Assisting the investigation are Brian Fitzpatrick, Neil Hendelman, and Christopher Mele. The litigation will be led by Alexander Vasilescu, Mr. Moustakis and Mr. Sunshine. The case is being supervised by Sanjay Wadhwa. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, the Department of Health and Human Services Office of Inspector General, and the Financial Industry Regulatory Authority.
SEC Press Release
--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.