By David S. Hilzenrath
Washington Post Staff Writer
Tuesday, November 2, 2010; 8:55 PM
A consultant to Human Genome Sciences, a Rockville biotech firm, has been charged with insider trading for allegedly tipping off a hedge fund about setbacks in the testing of a hepatitis drug, authorities said Tuesday.
The hedge fund avoided losses of about $30 million by selling HGS stock before the problems in the clinical trial were made public in early 2008 and the company's share price plummeted, the government alleged.
Yves Benhamou, a French physician who was helping to oversee the clinical trial of a drug called Albuferon, was arrested in Boston on Monday and appeared in court there Tuesday. By e-mail, a lawyer representing Benhamou declined to comment.
The Securities and Exchange Commission announced civil charges against Benhamou, and the U.S. attorney's office in Manhattan unveiled a criminal complaint.
In a news release, U.S. attorney Preet Bharara said the investigation is continuing.
The hedge fund, which has offices in New York, London and Greenwich, Conn., was not named in the charging documents. An unnamed portfolio manager at the fund was described in the criminal complaint as a "co-conspirator." News reports identified FrontPoint Partners, a unit of Morgan Stanley, as the firm that received the inside information.
FrontPoint said in a statement that it was cooperating with the probe and that it had placed an employee on leave pending the outcome. Morgan Stanley said last month that it was selling a majority stake to the firm's managers.
Benhamou served on a steering committee that oversaw a clinical trial of the drug Albuferon for Human Genome Sciences. He also worked as a consultant to hedge funds that traded in the health care sector, the government said.
In November 2007, Human Genome Sciences learned that one patient in the Albuferon trial died and that another developed lung disease, possibly as a side effect of the drug, according to court papers. By December, a panel of outside experts was considering stopping part of the trial.
The government's case against Benhamou draws heavily on cellphone records, e-mails and instant messages.
For example, on Dec. 10, 2007, Benhamou allegedly e-mailed the unnamed portfolio manager from Hawaii, asking to talk. Records cited in the criminal case show that Benhamou's cell phone was soon in contact with the portfolio manager's phone.
Then, the alleged co-conspirator's phone contacted a manager's line at the fund. During that call the manager e-mailed a trader to "sell 1/2 the HGSI in the funds."
Less than a minute later, the alleged co-conspirator e-mailed Benhamou, saying, "Let's keep this very confidential."
On Jan. 18, 2008, Human Genome Sciences sent Benhamou an e-mail saying that a safety committee had recommended stopping part of the Albuferon trial. Minutes after receiving the e-mail, the government said, Benhamou e-mailed the co-conspirator, asking, "When can I call you?"
The hedge fund employee replied, "now?"
About seven minutes later, the hedge fund employee sent an instant message to a trader at the fund, saying "sell the hgsi."
Days later, HGS said that it was stopping part of the trial. Its share price fell 44 percent.
HGS spokesman Jerry Parrott said the firm cooperated with the probe. Benhamou is no longer advising the company, he said.