Health Care's Epidemic of Insider Trading

On April 14, 2011, James Fan, 39, stood on a parking garage landing at Newark Liberty International Airport, a letter from his young son in his pants pocket, about to jump four stories to his death. Fan had been charged a day earlier with insider trading based on his knowledge of confidential test results at Seattle Genetics, a health-care company where he was manager of clinical programming. Also charged: his younger brother, Zishen, who was scheduled to take the oath of U.S. citizenship a month later. The total take, a judge later determined, was about $200,000. James Fan was trying to help his brother, who had found himself deep under water after the California real estate market collapsed in 2008, prosecutors said later. “The Fan case is such a cautionary tale,” says Jenny Durkan, the U.S. attorney in Seattle. “Both brothers were promising.”

The markets are awash in insider trading, and the health-care industry has been particularly hard-hit. Health-care businesses offer illegal traders abundant opportunities to profit from unpublicized data about earnings and deals. Pharmaceutical companies can live or die on the results of drug trials. And the industry has undergone significant consolidation, leading to several multibillion-dollar mergers. “Health care is particularly attractive to criminals because so much turns on the government regulatory approval,” says Rod Rosenstein, the U.S. attorney for Maryland. “If you have a pending application for a new drug, the difference between yes and no on approvals can be tens or hundreds of millions of dollars.”