FDA Chemist Liang Pleads Guilty to Insider Trading Tied to Drug Approvals

U.S. Food and Drug Administration chemist Cheng Yi Liang admitted using his access to the agency’s drug-approval process to make $3.8 million in an insider-trading scheme.

Liang, who worked for the FDA’s Center for Drug Evaluation and Research, pleaded guilty today in federal court in Greenbelt, Maryland, to one count of securities fraud and one count of making false statements. He faces a maximum penalty on the insider-trading charge of 20 years in prison and a $5 million fine and five years’ imprisonment on the false- statements charge when he’s sentenced on Jan. 9.

“Do you agree all those facts are true,” U.S. District Judge Deborah Chasanow asked Liang after Assistant U.S. Attorney David Salem described the scheme in court.

“I agree,” said Liang, who declined to comment after the hearing.

The government will likely seek a sentence in the range of 70 to 87 months while Liang will urge a range of 57 to 71 months, according to the agreement.

From July 2006 to March 2011, Liang, 57, bought and sold stock in more than 25 companies based on inside information from the FDA, according to a charging document. As part of his plea, Liang agreed to forfeit almost $3.8 million in bank and brokerage accounts and property, including his home in Gaithersburg, Maryland.

‘Shocking Abuse’

“In a shocking abuse of trust, Mr. Liang exploited his position as a chemist in the FDA’s Office of New Drug Quality Assessment to cash in, using the accounts of relatives and acquaintances to hide his illegal trading,” Assistant Attorney General Lanny Breuer, who oversees the Justice Department’s Criminal Division, said in an e-mailed statement. “Now, like many others on Wall Street and elsewhere, he is facing the significant consequences of trading stocks on inside information.”

In an interview, Liang’s lawyer, Andrew Carter, said his client submitted a resignation letter to the FDA. He said he didn’t know when it was sent. “Whether they’ve acted on it, I don’t know,” Carter said.

Erica Jefferson, a spokeswoman for the agency, said Liang’s resignation letter was received Sept. 9 and became effective that day.

“The FDA fully cooperated with the investigation and has begun taking steps to prevent this type of activity from happening again,” Jefferson said in an e-mailed statement.

Liang and his son Andrew were initially charged in March with conspiracy, wire fraud and securities fraud.

Son’s Guilty Plea

Andrew Liang pleaded guilty last month to possession of child pornography found in the course of the fraud investigation. He faces as long as 10 years in prison plus a $250,000 fine when he is sentenced in December. He must also register as a sex offender.

The securities case against Andrew Liang was dismissed at the request of prosecutors.

The Securities and Exchange Commission, in a parallel civil lawsuit also in Greenbelt, said Cheng Yi Liang traded in smaller developmental drug companies, whose stock prices would be more likely to be affected significantly by government decisions. He gained more than $1 million trading stock of Vanda Pharmaceuticals Inc. (VNDA), a Rockville, Maryland, firm that rose more than sevenfold a day after the FDA cleared sales of its schizophrenia drug Fanapt in May 2009, according to the lawsuit.

Liang, an FDA employee since 1996, worked in the drug evaluation unit since at least 2001. He had access to nonpublic records of the review process for each drug examined by the office, prosecutors said.

Stock Purchases

He profited from share purchases ahead of 19 positive announcements and on short sales before six negative decisions, the SEC said. He also avoided losses by selling stock before two other negative decisions, the agency said. His average profit on each announcement was $135,015, according to the lawsuit.

Liang made the trades using his home computer or an Apple iPad, according to the agreement.

He made about $380,000 in advance of a Jan. 21 announcement that Newton, Massachusetts-based Clinical Data Inc. (CLDA)’s Viibryd, a drug to treat a depressive disorder, had been approved, prosecutors said.

Chasanow said today that she has ordered that the pending SEC case and forfeiture action be transferred from another judge to her courtroom.

The cases are U.S. v. Chen Yi Liang, 11-cr-0530, and U.S. v. Andrew Liang, 11-cr-00501, U.S. District Court, District of Maryland (Greenbelt).

To contact the reporter on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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