Former Top FDA Official Gave Insider Data to Hedge Fund Leading to $32 Million Windfalls

Friday, June 17, 2016
Sanjay Valvani (photo: Nicholas Hunt, Getty Images)


By Alexandra Stevenson, New York Times


A multibillion-dollar hedge fund focused on health care had an inside view of the drug approval process at the Food and Drug Administration through a former high-ranking official turned consultant.


The information flow turned out to be lucrative, leading to $32 million in trading windfalls, federal prosecutors said Wednesday.


In an insider-trading case that harks back to the height of a federal crackdown on the hedge fund industry six years ago, federal authorities filed criminal and civil securities charges against three current and former traders at Visium Asset Management, including Sanjay Valvani, one of the firm’s top portfolio managers and the former brother-in-law of the firm’s founder.


At the heart of the case is a former FDA official, Gordon Johnston, the consultant who prosecutors say leveraged his contacts at the agency, where he was deputy director of the office of generic drugs until 1999. Johnston also abused his role at the Generic Drug Trade Association to glean information on behalf of Valvani, prosecutors said.


In his quest to provide Valvani with valuable information, Johnston went as far as to arrange speaking panels and teleconferences between FDA officials and generic drug manufacturers in order to discuss issues that directly concerned his hedge fund client, the government said.


Through this arrangement, Valvani was able to reap the nearly $32 million in illicit gains based on information about coming FDA approvals for a generic version of a drug that helps prevent blood clots, according to court filings. Prosecutors have accused Valvani of passing on the tips to Christopher Plaford, a former colleague, who used this information and other insider tips to garner illegal gains.


Johnston and Plaford, who is also charged with trading on illegal tips from a former official at the Centers for Medicare and Medicaid Services, pleaded guilty and are cooperating with the government.


“Valvani and his hedge funds made millions by trading on nonpublic FDA drug approval information not available to the rest of the stock market,” said Andrew J. Ceresney, the director of the Securities and Exchange Commission’s division of enforcement.


Valvani, 44, and Johnston, 64, were introduced through a so-called expert network in 2005 and quickly entered into a private arrangement that spanned more than five years. During that period, Johnston received a monthly payment that started at $3,000 and later went up to as much as $5,000 for his inside information, the government said. From 2009 to 2010, Johnston received $108,000 for information.


Their scheme is reminiscent of a time when expert networks — firms that connected hedge fund managers with experts in various fields — were commonly used by the industry to get an investing edge. These networks were the focus of a relentless and multiyear crackdown on insider trading in the hedge fund industry brought by Preet Bharara, the U.S. attorney for the Southern District of New York. His prosecutions resulted in the convictions of more than 80 traders, consultants and analysts in the hedge fund industry. Several of those convictions involved traders at SAC Capital Advisors, the former hedge fund owned by billionaire investor Steven A. Cohen.


Barry H. Berke, a lawyer representing Valvani, said his client was innocent and added that his “investment decisions were always based on rigorous and entirely appropriate research and analysis, consistent with his high integrity.”


“The prosecution of Mr. Valvani is yet another example of this United States attorney’s office stretching the facts and law to try to transform entirely innocent trading decisions into a crime,” said Berke, who also represented Michael S. Steinberg, the highest-ranking SAC Capital employee to stand trial for insider trading.


Last year, the government was forced to drop Steinberg’s conviction after a federal appellate court decision to overturn two prominent convictions in 2014. The ruling dealt a blow to Bharara’s office; prosecutors argued that it was the greatest setback in decades and warned that it would stall any new cases.


In charging Visium employees and Johnston on Wednesday, the government is sending a strong signal that it can still bring new insider trading cases. The government has gained momentum over the last month, having filed criminal charges against William T. Walters, a high-rolling Las Vegas gambler, and Thomas C. Davis, a former Dean Foods chairman, in a case that also ensnared golfer Phil Mickelson, who was named a relief defendant.


The government on Wednesday brought separate charges against Plaford and Stefan Lumiere, who are both former Visium employees, accusing them of conspiring to inflate the value of certain stock positions to extract bigger payouts from Visium investors. Lumiere and Plaford are accused of engaging in a fraudulent scheme over an 18-month period, using “fake” quotes from a broker to hide the real value of at least 28 securities each month. They used a personal cellphone or a flash drive that was delivered by courier to pass along the inflated price quotes. Their compensation was based in part on the valuation of these securities. In all, these inflated prices led to a $5.9 million payout of performance fees.


Lumiere’s lawyer declined to comment.


“Sadly, these are schemes we see time and time again, where lies and use of nonpublic information profit those conducting the crimes and everyday investors lose out,” said Diego Rodriguez, assistant director in charge at the FBI.


Jacob Gottlieb, the founder and chief investment officer at Visium, which had as much as $8 billion of assets earlier this year, told investors in March that the firm was being investigated by the Justice Department and the SEC. He said the government was looking at the firm’s trading of certain securities and its use of a consultant more than five years ago. Gottlieb was until recently married to Lumiere’s sister. Valvani was put on paid leave in April.


On Wednesday, Gottlieb said in a statement, “I am deeply saddened by today’s events.”


At one time, Visium was among the top-performing hedge funds in the industry. Founded in 2005, it has long focused on investments in health care companies and was one of more than a handful of hedge funds that piled into shares of Valeant Pharmaceuticals International last year. So far this year, it has lost investors’ money.


Johnston’s source at the FDA was a mentee and employee that he supervised when he worked at the agency, prosecutors said. During conversations with this source, who was not named, and other experts, Johnston engaged in “banter with professional discussions,” the government said, as well as “gossip about mutual friends and colleagues in order to hide his efforts to obtain nonpublic information.”


To Learn More:

85-Case Winning Streak for Insider Trading Prosecutor Comes to an End (by Noel Brinkerhoff, AllGov)

SAC Hedge Fund Agrees to Largest Ever Insider Trading Penalty (by Noel Brinkerhoff, AllGov)

Justice Dept. Files Largest Insider Trading Case in History (by Noel Brinkerhoff, AllGov)

House of Representatives Waters Down Insider Trading Bill to Protect “Consultants” (by Noel Brinkerhoff, AllGov)


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