Ex-FDA chemist gets 5 years for insider trading

March 5, 2012

Cheng Yi Liang endured forced labor during China’s Cultural Revolution, earned a doctorate in the United States and built a life in Gaithersburg as a chemist at the Food and Drug Administration. He was also extraordinarily successful at playing the stock market.

But on Monday, Liang, 58, stood before a federal judge and was sentenced to five years in prison for insider trading. By his own account, his life is in tatters.

Throughout the Washington area, countless federal employees have routine access to the kind of information that can move financial markets. Liang, who pleaded guilty last year, is one of the rare government workers charged with illegally trading on that information.

The government says it hopes his punishment makes others think twice.

“For years, he exploited his position in the agency to make easy money,” Assistant Attorney General Lanny A. Breuer said in a statement. “But today’s sentence shows that easy money has consequences.”

Liang reaped profits or avoided losses of almost $3.8 million from trading on confidential information about how drugs were faring in the FDA approval process. The scheme spanned almost five years and involved hundreds of trades and more than 20 stocks, the government said.

For advance knowledge of whether pharmaceutical company shares were likely to rise or fall, he peered into a sensitive FDA database, the government said.

Federal guidelines called for a prison term of 57 to 71 months, and the Justice Department argued for a sentence at the high end of the range.

Liang’s case “will be a benchmark by which any subsequent insider trading cases against government employees will be judged,” Justice argued in a court filing. “It is critical that the bar be set high.”

All the more so, the government said, given “the tremendous difficulty in uncovering this type of offense — as demonstrated by the length of time over which Liang was able to operate his scheme.”

Liang, represented by a public defender, had sought a sentence of 30 months.

In its plea for a lower sentence, the defense had filed a pile of FDA certificates praising Liang for exemplary performance. He is scheduled to turn himself in next month, said Joseph L. Evans, assistant federal public defender.

“He’s deeply, deeply remorseful for what he did,” Evans said. At the federal court in Greenbelt on Monday, Liang apologized to the FDA and the country that took him in, Evans said.

Liang was born in Shanghai, the son of an accountant and a teacher, according to a defense document. During China’s repressive Cultural Revolution, he was forced to move to the countryside and work as a farm laborer, but he was later able to pursue his education in Shanghai and at the University of Iowa, the court filing said. Earlier in his career, he was a cancer researcher, the filing said.

The defense’s pre-sentencing memo to the court said Liang had an “authentic addiction to day trading” and “became utterly and woefully immersed in trading for trading’s sake.”

The government rejected that argument, saying that Liang knew he was breaking the law and went to considerable lengths to cover his tracks. He used accounts he set up in the names of friends and family members, including his son, his brother-in-law and his elderly parents. Many of the accounts were offshore, which helped Liang avoid taxes, the government said.

Liang “failed to report the vast majority of his illicit income to the IRS,” the government said.

The defense argued in a court filing that Liang did not use his illicit profits to fund a “lavish, opulent, or indulgent lifestyle.” He was supporting three households, including his elderly parents and in-laws in China, the defense said.

The government rebutted that defense, too, saying Liang “was motivated by greed.”

While making about $107,000 annually as a government employee in 2008, Liang paid $64,000 by check for two cars, including an Infiniti sports car, the government said.

The defense lawyer said the Infiniti was to replace a car that was wrecked in a crash.

The defense said Liang’s offense paled in comparison to that of insider trading defendants in New York, such as hedge fund mogul Raj Rajaratnam.

The government said the opposite was true. Most of those defendants traded in one or two securities, it said, and few carried out schemes as long as Liang’s. None of them “were federal government employees entrusted with scientific information intended to improve human life,” the government said.

“Measured against those facts, many of the New York defendants’ crimes instead pale in comparison to Liang’s,” the government said.

Liang confessed the day he was arrested last year, the government said.

The fallout from the case has taken a toll on his family, particularly a son, Andrew. Because Liang used brokerage accounts in his son’s name, the government said, Andrew Liang was arrested on accusations of securities fraud, his computer was seized, and he was later sentenced to just over a year in prison for possession of child pornography.

“It goes without saying that Dr. Liang feels directly and personally responsible for his son’s prosecution and incarceration,” his sentencing memorandum said.

Overall, the public exposure “has been humiliating,” his family has been impoverished, and Liang “is overwhelmed with personal guilt and a sense of failure,” the defense memo said. The case has left him saddled with a $2.7 million civil judgment, on top of assets he has already forfeited, Evans said.

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