FDA chemist charged with insider trading

March 29, 2011

As a chemist at the Food and Drug Administration, which screens medicines for sale to the public, Cheng Yi Liang had access to the kind of information that can move drug company stocks.

According to the government, he has illegally traded on that information in advance of at least 27 FDA announcements since 2006, reaping profits or avoiding losses of more than $3.6 million.

Liang, 57, was arrested at his Gaithersburg home early Tuesday, along with his son Andrew Liang, 25, who is accused of participating in the scheme. The two face criminal charges, and the elder Liang also is named in a civil insider trading suit filed by the Securities and Exchange Commission.

The case is part of a broader federal crackdown on insider trading that stretches from California’s Silicon Valley to Manhattan, where a hedge fund billionaire is currently on trial for allegedly trading on such precious secrets as confidential information about a deal involving Wall Street powerhouse Goldman Sachs and investment sage Warren Buffett. (Buffett is a director of The Washington Post Co.)

The charges against Liang add a new dimension.

The Washington area is teeming with government workers who have access to financially sensitive information. The SEC has long suspected that federal employees exploit government secrets in the financial markets, but actual insider trading cases against government employees are rare, said Jacob S. Frenkel, a lawyer in Potomac who has been a federal prosecutor and a member of the SEC enforcement staff.

“It’s one thing for SEC enforcement to believe that this goes on,” Frenkel said. “It’s another to catch it.”

A lawyer for Liang did not return a call seeking comment about the charges. A lawyer for his son declined to comment.

“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 A. Breuer said in a news release. “According to the complaint, he and his son repeatedly violated that trust to line their own pockets.”

Cheng Yi Liang has been employed at the FDA since 1996. For most of that time, he has been at the Center for Drug Evaluation and Research in Silver Spring, where as of last August his annual pay was $122,744, the government said.

The center is responsible for assessing whether drugs are safe and effective before they are cleared for sale to the public, a process that involves teams of doctors, microbiologists, statisticians and other experts. These decisions can instantly change the fortunes of pharmaceutical companies and send their shares soaring or plunging.

Liang had access to an FDA database full of confidential information about drugs under review — results of FDA trials, correspondence with the manufacturers, internal memos and more, the government said. He focused on the stocks of smaller companies because FDA decisions about individual drugs would affect such companies’ stock more significantly, the government said.

If the news was going to be good for a stock, he bought shares, the government said. If it was going to be negative, the government said, he sold or placed bets that the shares would fall, a technique known as shorting.

Liang went to elaborate lengths to conceal his trading, the government said. He allegedly used seven brokerage accounts held in the names of other people, including his 84-year-old mother in Shanghai. One was opened in his son’s name at Scottrade.

To finance the scheme, Liang used a home equity line of credit, the government said.

One of the companies he allegedly traded was Clinical Data, which early this year was awaiting FDA word on its new drug Viibryd, intended as a treatment for major depression. The FDA’s announcement was due on Jan. 22.

On the morning of January 6, Liang began buying shares of Clinical Data, investing more than $243,000, the government said. That afternoon and the next day, he twice logged into the FDA database to review documents on Viibryd, the government said.

In the days that followed, he bought more shares, and he checked the database on Viibryd 20 more times, the government said.

On Friday, Jan. 21, after the markets closed for the weekend, the FDA announced that it was approving Viibryd. By the close of trading the following Monday, Clinical Data’s stock price had leapt 67 percent.

Liang sold all of his shares of the stock that day, netting a profit of $379,602, the government said.

His most lucrative trading allegedly involved the shares of another company, Vanda Pharmaceuticals, which netted the Liangs more than $1 million, a profit of almost 800 percent, the Justice Department said.

The government monitored Liang’s use of the confidential FDA database with software installed on his work computer on Jan. 6. The software allowed the government to capture screen shots from the computer, the Justice Department said.

Though Liang used accounts that bore other people’s names, the government linked him to the accounts through computer IP addresses used to direct trades. At least $1.18 million was transferred from the brokerage accounts to bank accounts belonging to Liang and his wife, the government said.

Still other checks from the brokerage accounts were used to buy an Infiniti sedan and a Honda Odyssey minivan registered to Liang and his wife, the SEC said.

Some of the illicit earnings also went to people whose names appeared on the accounts Liang used, the government said.

Asked about the charges, FDA spokeswoman Karen Riley would not go beyond a brief statement that said in part, “The agency is cooperating fully with the authorities and will review the situation and take any appropriate action.”

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