The U.S. Securities and Exchange Commission filed a complaint yesterday in what is billed as the ‘most lucrative insider trading scheme ever’ and which implicates SAC’s Steve Cohen. Once again, an expert network is prominent in the case, although the firm was not named in the SEC’s complaint. It appears the expert network mentioned in the SEC complaint was Gerson Lehrman Group (GLG). The SEC’s complaint cites numerous instances when the accused individuals explicitly circumvented the expert network’s compliance controls. This, and the fact that GLG was unnamed in the complaint, suggests that GLG is not a target of the SEC. However, this is cold comfort to the expert network industry, which is once again being associated with insider trading.
The case centers on an Alzheimer’s drug jointly developed by Elan Corporation, plc and Wyeth (we’ve moved on from technology-related insider trading cases to healthcare). Mathew Martoma, a portfolio manager at CR Intrinsic, which is affiliated with SAC Capital, met Dr. Sidney Gilman, who was overseeing the clinical trials for the Alzheimer’s drug, through “paid consultations that took place between 2006 and 2008, and were arranged by a New York-based expert network firm.” The SEC says that Gilman earned nearly $108,000 between 2006 and 2008 from fifty-nine consultations with portfolio managers and analysts at CR Intrinsic and SAC Capital, including forty-two consultations just with Martoma. His fee was $1000 per hour.
According to the Wall Street Journal, Gilman’s resume on the Web page of the University of Michigan Health System says he began consulting for Gerson Lehrman Group in 2002. According to Bloomberg, Gilman worked for Gerson Lehrman Group’s Scientific Advisory Board starting in 2002, based on an 2011 curriculum vitae posted online by the University of Michigan. Reuters reports that a disclosure attached to a paper by Gilman in the medical journal Neurology lists him as a consultant for the Gerson Lehrman Group. If Gilman was a GLG Council Member, his profile has since been removed from the GLG website.
The SEC complaint is careful to cite instances when Martoma and Gilman allegedly circumvented the expert network’s compliance controls:
“Martoma and Gilman also took steps to conceal the true topic of their conversations from the expert network firm. For example, when Martoma scheduled a consultation with Gilman three hours after the March 18, 2008 SMC meeting, Martoma reported to the expert network firm that the purpose of the call was “Follow-up with Dr. Gilman: AAN Abstract Preview” even though Martoma and Gilman had discussed the Phase II Trial during the consultation. Later, in advance of a consultation that Gilman’s personal calendar noted was to discuss side-effects that the Phase II Trial was finding in patients taking bapi, Gilman emailed Martoma and asked him to set up· a consultation with the expert network firm, suggesting that Martoma tell the expert network firm that the consultation was to discuss a drug to treat Parkinson’s disease.”
The SEC also notes that Gilman received training on the prohibitions of the federal securities laws from the expert network firm, which repeatedly reminded Gilman not to share nonpublic information with clients. Emails sent to Gilman by the expert network firm also listed the Alzheimer’s drug in question as a topic that Gilman was “not allowed to discuss.”
The SEC complaint suggests that Martoma and Gilman were aware of the expert network’s compliance controls and explicitly circumvented them. Were there additional steps that the expert network could have taken in this case to prevent inside information being passed by one of its experts? The SEC complaint is silent on this. It mentions that the consultations arranged through the expert network usually occurred immediately after meetings of the Safety Monitory Committee overseeing the clinical trial of the drug. However, it is not reasonable to expect that the expert network would know when the committee meetings occurred.
Many of an expert network’s compliance controls are client-dependent. The expert network offers safeguards, but it is up to the compliance staff and users of the expert network to utilize them. Many expert networks, including GLG, offer the ability to record consultations, but few clients utilize this feature. Most expert networks, including GLG, offering chaperoning, which allows compliance staff from a client to listen in on consultations on an announced or unannounced basis. Here again, the onus is on the client.
The reality is that most compliance controls can be circumvented if someone is intent on wrong doing. Most consultations through expert networks are not monitored, making it difficult to catch illegal activity.
The timing of this latest case is unfortunate. Expert networks, and primary research firms generally, were starting to recover from the severe declines in usage which hit in late 2010 and early 2011 as the insider trading cases first involved expert networks. GLG has been gaining market share, albeit in a shrinking market, in large part because of the strength of its compliance platform. The latest publicity will renew fears that were starting to die down, and presage continued pressure on the top line.