October 18, 11

NEWS / FDA Chemist Pleads Guilty to Using Insider Information to Trade on Pharmaceutical Stocks Resulting i

Failed to Disclose the Illicit Profits on Financial Forms

WASHINGTON – A Food and Drug Administration (FDA) chemist pleaded guilty today before U.S. District Court Judge Deborah K. Chasanow in the District of Maryland to one count of securities fraud and one count of making false statements, related to a $3.7 million insider trading scheme that spanned nearly five years.



The guilty plea was announced by Assistant Attorney General Lanny A. Breuer of the Justice Department’s Criminal Division; U.S. Attorney for the District of Maryland Rod J. Rosenstein; James W. McJunkin, Assistant Director in Charge of the FBI’s Washington Field Office; and Elton Malone, Special Agent in Charge of the Department of Health and Human Services, Office of the Inspector General (HHS-OIG), Office of Investigations, Special Investigations Branch.



According to court documents and statements made during court proceedings, Cheng Yi Liang, 57, of Gaithersburg, Md., has been employed as a chemist since 1996 at the FDA’s Office of New Drug Quality Assessment (NDQA). Through his work at NDQA, Liang had access to the FDA’s password-protected internal tracking system for new drug applications, known as the Document Archiving, Reporting and Regulatory Tracking System (DARRTS), which is used to manage, track, receive and report on new drug applications. Liang reviewed DARRTS for information relating to the progression of experimental drugs through the FDA approval process. Much of the information accessible on the DARRTS system constituted material, non-public information regarding pharmaceutical companies that had submitted their experimental drugs to the FDA for review.



“Mr. Liang used inside information about pharmaceutical companies – information he had access to solely because of his position at the FDA – to pocket millions in illicit profits,” said Assistant Attorney General Breuer. “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. Now, like many others on Wall Street and elsewhere, he is facing the significant consequences of trading stocks on inside information.”



“Those who use privileged and valuable information for personal gain, break the trust placed in them as a government employee and the integrity of the research they conduct on behalf of the U.S. government,” said Assistant Director in Charge McJunkin of the FBI’s Washington Field Office. “This case is the result of long hours and hard work by the FBI and HHS-OIG Special Agents who are tasked with enforcing laws and regulations designed to ensure the fair operation of our financial markets.”



“Profiting based on sensitive, insider information is not only illegal, but taints the image of thousands of hard-working government employees,” said Special Agent in Charge Malone of the HHS-OIG Special Investigations Branch. “We will continue to insist that federal government employee conduct be held to the highest of standards.”



Liang admitted that from approximately July 2006 through March 2011, he used the inside information he learned from DARRTS and other sources to trade in the securities of pharmaceutical companies. Liang used accounts of relatives, including his son, and acquaintances to execute the trades (referred to as the controlled accounts). When the inside information was positive about a company’s product, Liang used the controlled accounts to purchase securities. When the inside information was negative, Liang would make trades in anticipation of the stocks’ downward movement. Liang admitted that he used these controlled accounts to execute trades to profit from the change in the company’s share price after the FDA’s action was made public, resulting in total profits and losses avoided of more than $3.7 million.



For example, on May 21, 2010, the FDA accepted Clinical Data Inc.’s application for Viibryd, an anti-depressant. According to court documents, on Jan. 6, 2011, HHS-OIG installed software on Liang’s work computer, allowing it to collect screen shots from that computer, which revealed Liang regularly accessed the DARRTS system and reviewed information regarding Clinical Data’s drug Viibryd. Between Jan. 6, 2011, and Jan. 20, 2011, Liang purchased a total of 46,875 shares of Clinical Data stock using the controlled accounts. After the markets closed on Friday, Jan. 21, 2011, news of the FDA’s approval of Viibryd was reported. Clinical Data’s stock, which had closed that day at approximately $15.03 per share opened the following Monday, Jan. 24, 2011, at approximately $24.76 per share. Liang then sold all 46,875 shares of Clinical Data stock in the controlled accounts, netting a total profit of approximately $384,300.



During the time he was employed by the FDA, Mr. Liang was required to file a Confidential Financial Disclosure form disclosing, among other things, investment assets with a value greater than $1,000 and sources of income greater than $200. During the time period of his insider trading scheme, Liang annually filed these forms and failed to disclose using the controlled accounts or his income from the illicit securities trading.



Sentencing is scheduled for Jan. 9, 2012, at 12:30 p.m. The maximum penalty for the securities fraud count is 20 years in prison and a fine of $5 million, or twice the gross gain from the offense. The maximum penalty for the false statement count is five years in prison and a fine of $250,000.



As part of his plea agreement, Liang has agreed to forfeit $3,776,152, including a home and condominium in Montgomery County, Md., along with funds held in 10 bank or investment accounts.



The U.S. Securities and Exchange Commission (SEC) is currently pursuing civil charges against Liang and several accounts he controlled. That action is still pending.



This case is being prosecuted by Trial Attorneys Kevin Muhlendorf and Thomas Hall of the Criminal Division’s Fraud Section, Assistant U.S. Attorney David Salem for the District of Maryland and Senior Trial Attorney Pamela J. Hicks of the Criminal Division’s Asset Forfeiture and Money Laundering Section. The case was investigated by the FBI’s Washington Field Office and the HHS-OIG.



This case is an example of the close coordination between the Department of Justice and the SEC. The department recognizes the substantial assistance of the SEC, specifically the Market Abuse Unit of the SEC’s Enforcement Division, which conducted its own investigation and referred the conduct to the department.



This prosecution is part of efforts underway by President Barack Obama’s Financial Fraud Enforcement Task Force. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes. For more information about the task force visit: www.stopfraud.gov.

http://www.justice.gov/opa/pr/2011/October/11-crm-1373.html

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