Two hedge fund managers and a consultant were charged Wednesday for allegedly making about $32 million through insider trades based on confidential information obtained from the FDA, and a fourth person was charged in a related case.
Sanjay Valvani, Gordon Johnston and Christopher Plaford were charged in the alleged insider trading scheme. Valvani, a hedge fund manager for Visium Asset Management LP, allegedly received tips on drug approvals from former FDA offical Johnston, who was working for a generic drug trade association and served as a consultant to Visium.
In a related case, Plaford and trader Stefan Lumiere were accused of falsely inflating the value of securities held in a hedge fund. Plaford made about $300,000 from drug tips from Valvani, and Lumiere and Plaford worked to inflate the value of the hedge fund they advised by creating sham broker quotes, the SEC claims.
It's a tangled web. The SEC claims Johnston used his FDA connections to get advance information about drug approvals, then passed that information along to Valvani. Johnston got paid as a consultant by Visium but concealed that relationship from his FDA contacts, the SEC claims.
Valvani used the insider information to make trades and profit about $32 million, and in turn tipped Plaford, according to the SEC. Plaford made $300,000 from the inside information and is cooperating with the SEC, the agency said.
“Valvani and his hedge funds made millions by trading on nonpublic FDA drug approval information not available to the rest of the stock market," Andrew J. Ceresney, director of the SEC's enforcement, said in a statement Wednesday.
The SEC also says Lumiere worked with Plaford to inflate the value of securities in a hedge fund that was advised by their firm. Over 18 months, Lumiere allegedly used sham quotes "to mismark as many as 28 securities per month, surreptitiously passing his desired prices along to brokers via his personal cell phone or a flash drive delivered by a courier," the SEC reported in a news release.
The fund subsequently reported inflated returns and asset values -- and subsequently "paid out more than $5.9 million in inflated management and performance fees to its investment adviser," the SEC claims.
In addition to the SEC complaint, the U.S. Attorney's Office for the Southern District of New York has charged all four with various securities violations.