New York – A new wrinkle in the ongoing insider trading investigation emerged today as Massachusetts officials accused James Silverman of acting on information he received from Guidepoint Global, an expert network with a strong presence in the healthcare industry. William Galvin, the Secretary of the Commonwealth lodged an administrative complaint against Silverman and his fund, Risk Reward Capital Management for using Guidepoint Global to get inside information and gain “dramatic returns”. Guidepoint has not been charged with any wrongdoing.
Background on Silverman and the complaint against him
Silverman started the RRC Bio Fund in 2007 and lost 17% in 2008, but was able to turn that around and return 55% and 52% in 2009 and 2010 respectively. The complaint alleges that this turnaround resulted from the use of material nonpublic information received through consultations that Guidepoint set up. As of November, the fund had $24 million in assets.
The complaint gets even more detailed, alleging that Silverman’s fund received information pertaining to clinical trials being conducted by Ariad Pharmaceuticals Inc. and Questcor Pharmaceuticals Inc. The complaint states that, “Despite their confidentiality obligations, each investigator provided Silverman material, nonpublic information regarding how the trial was progressing. In return, the investigators received anywhere between $400 and $1,000 an hour through Guidepoint.”
The complaint also alleges that Silverman got nonpublic information pertaining to Questcor’s treatment for nephritic syndrome and bought 58,800 shares of the stock before the results of a study were published in a medical journal.
Perhaps the most damning evidence against Silverman is this quote from the complaint which states that “Silverman apparently also knew that he should not have received this information, as he deleted his notes containing the study results prior to producing them to the (Securities) division in response to its subpoena”. While visiting Silverman’s offices, investigators found sensitive records strewn all over the place. When they found evidence that Silverman had possibly deleted documents related to Guidepoint, Silverman allegedly stated that “maybe I crossed a line on this one.”
Silverman’s lawyer meanwhile, called the allegations brought by Galvin and his office “unfounded and reckless”. Silverman’s lawyer pointed to the fact that institutional investors use services like Guidepoint all the time as a part of their due diligence as a defense for his actions. Of course, the fact that some investors use expert networks responsibly does not mean that everyone does.
What it means for Guidepoint
The complaint also finds some fault with Guidepoint even though no charges have been brought. Galvin’s office stated that Guidepoint failed to screen confidentiality agreements and “does not monitor consultations or inquire about their substance…Rather than taking proactive steps, Guidepoint places the responsibility of recognizing and avoiding such conflict squarely upon the expert consultant.” This however is standard practice for expert networks.
Previously, we have discussed that Guidepoint’s terms and conditions prohibited experts like Dr. Benhamou from sharing the developments from the clinical trials he was involved in. A spokesman for Guidepoint was quick to point out that the “investigation has resulted in no action being brought against Guidepoint Global or any of its employees, and the Secretary’s complaint does not assert that Guidepoint Global knew of, or participated in, any of the misconduct alleged.”
This is not the first time that Guidepoint’s name has come up in discussions of insider trading. Both Winifred Jiau and Dr. Benhamou worked for Guidepoint, with the introduction of Dr. Benhamou to Frontpoint (Human Genome Sciences) likely having been made by Guidepoint initially. It should also be noted that Guidepoint keeps a record of all consultations, and Dr. Benhamou avoided using Guidepoint in order to pass material nonpublic information.
We have previously written about what all of these allegations mean for expert networks, and also about which firms are out there currently. Guidepoint has garnered a large share of the expert network industry, the exact ramifications of this complaint on its bottom line, and the bottom line on all expert networks remains to be seen.