U.S. Charges FDA Chemist in $3 Million Inside-Trading Scheme

SEC Sues FDA Chemist
The Securities and Exchange Commission says Cheng Yi Liang, 57, made trades ahead of Food and Drug Administration drug decisions. Photographer: Joshua Roberts/Bloomberg

A U.S. Food and Drug Administration chemist and his son were arrested by federal authorities and accused of reaping at least $3 million from trading on nonpublic information related to drug-approval applications.

Cheng Yi Liang, 57, and Andrew Liang, 25, face charges of conspiracy to commit securities and wire fraud, according to a Justice Department statement today. The Securities and Exchange Commission, in a parallel civil suit filed at federal court in Greenbelt, Maryland, said the elder Liang made $3.6 million by trading shares of 19 firms before 27 FDA decisions since 2006.

The chemist, who worked for the FDA’s Center for Drug Evaluation and Research, violated his duty as a federal employee not to engage in financial transactions using nonpublic government information and not to use such information for his personal benefit, according to the SEC. The agency is seeking disgorgement of illegal profits and unspecified fines.

“The insider trading laws apply to employees of the federal government just as they do to Wall Street traders, corporate insiders, or hedge fund executives,” Daniel Hawke, head of the SEC’s market abuse unit, said in a statement.

The SEC and Justice Department investigations are continuing.

Maximum Penalty

The maximum penalty for conspiracy to commit securities and wire fraud is five years in prison and a $250,000 fine, or twice the gross gain from the offense, according to the Justice Department. For wire fraud, the maximum penalty is 20 years in prison and a fine of $250,000, or twice the gross gain, the department said. For securities fraud, the top penalty is 20 years in prison and a fine of $5 million for each count.

Liang, identified by the SEC as a resident of Gaithersburg, Maryland, didn’t respond to a phone call to his home seeking comment.

“FDA is aware that one of its employees has been charged with insider trading,” Erica V. Jefferson, a spokeswoman for the agency, said in an e-mail statement. “The agency is cooperating fully with the authorities and will review the situation and take any appropriate action.”

Liang traded in smaller developmental drug companies, where a government decision would be more likely to have a significant impact on the stock price, the SEC said. He gained more than $1 million trading stock of Vanda Pharmaceuticals Inc. a Rockville, Maryland, firm that rose more than 600 percent a day after the FDA cleared sales of its schizophrenia drug Fanapt in May 2009, according to the lawsuit.

Computer Access

An FDA employee since 1996 who has worked in the CDER unit since at least 2001, Liang had computer access to the nonpublic records of the review process for each drug examined by the office, the SEC said.

He profited from share purchases ahead of 19 positive announcements and on short sales before 6 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.

In June 2006, Liang made more than $75,000 on short sales of Encysive Pharmaceuticals Inc. shares after accessing confidential FDA information that approval for Thelin, a drug to treat pulmonary arterial hypertension, wasn’t forthcoming, the SEC said. He also made about $380,000 in advance of a Jan. 21 announcement that Newton, Massachusetts-based Clinical Data Inc.’s Viibryd, a drug to treat a depressive disorder, had been approved, the SEC said.

Rather than use his own or his wife’s brokerage accounts, Liang directed the trading through seven accounts held by other people, the SEC said. He typically began building a position two to three weeks before an announcement, according to the lawsuit. Most proceeds were moved to his bank account, the SEC said.

Car Dealerships

Checks totaling at least $1.2 million were written from the accounts Liang used for trading to a bank account in his name, to him or his wife directly, or to credit-card companies to pay off his balances. About $65,000 worth of checks were written from the brokerage accounts to car dealerships to purchase an Infiniti sedan and a Honda Odyssey minivan registered to Liang and his wife.

Illegal trading profits were also transferred to bank and brokerage accounts benefiting Andrew Liang, who used the proceeds to fund his personal retirement account, pay about $92,000 to the U.S. Internal Revenue Service, pay a travel service and purchase two cars, the Justice Department said.

The FDA is barred from disclosing that a drug application has been filed, whether it is conducting a review and whether it has issued a so-called complete response letter that describes specific deficiencies in the application, according to the lawsuit. The FDA only discloses information when it approves a new drug, the SEC said.

‘Privileged Information’

“Cheng Yi Liang was entrusted with privileged information to perform his job of ensuring the health and safety of his fellow citizens,” Assistant Attorney General Lanny Breuer said in a statement. “According to the complaint, he and his son repeatedly violated that trust to line their own pockets.”

The SEC’s case is Securities and Exchange Commission vs. Cheng Yi Liang, 8:11-cv-00819-RWT, District of Maryland (Greenbelt Division). The criminal cases are U.S. v. Chen Yi Liang, 8:11-mj-01236-WGC, and U.S. v. Andrew Liang, 8:11-mj-01237-WGC, District of Maryland.

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