Your friendly neighborhood SEC


New York – Briefly mentioned in yesterday’s article was the fact that the SEC has recently charged a chemist working for the FDA with insider trading.  The suit alleges that Cheng Yi Liang (and his son) made around $3.6 Million based off of knowledge Liang had on drug approvals from his work at the Center for Drug Evaluation and Research.

What is interesting about this particular case however is that unlike with the Galleon or Primary Global focused cases, the target in this lawsuit is a federal employee.

The lawsuit is fairly specific identifying shares of 19 firms that Liang traded before 27 FDA decisions since 2006.  Daniel Hawke, head of the SEC’s Market Abuse unit said that “The insider trading laws apply to employees of the federal government just as they do to Wall Street traders, corporate insiders, or hedge fund executives.”  The SEC is seeking disgorgement of illegal profits and unspecified fines.

The lawsuit was brought by the Market Abuse unit, one of the five new units that the SEC announced in January of last year.  The five units are the: Asset Management, Market Abuse, Structured and New Products, Foreign Corrupt Practices, and Municipal Securities and Public Pensions. The point of each of these units is to address “challenges through improved understanding of complex products and markets, earlier and better capability to detect emerging fraud and misconduct, greater capacity to file cases with strike-force speed, and an increase in expertise throughout the Division” according to Rober Khuzami, the director of the Division of Enforcement.

In other words, each of these five groups is aiming to become experts in a specific field and to do a better and faster job of identifying mischief.  According to Philip Kirstein, senior officer and independent compliance officer for the Alliance Bernstein Mutual Funds, this spells “trouble with a capital T”. Particularly worrisome for the fund industry in the opinion of Kirstein is the Asset Management unit headed by Bruce Karpati and Robert Kaplan.  The unit has 60 members and will likely try to prove the need for those employees by being active.

Of course, this particular case was brought by the Market Abuse unit, which focuses on insider trading and market manipulation.  Thomas Biolsi from PricewaterhouseCoopers has said previously that the Market Abuse unit “believe[s] that insider trading does take place at organizations other than just hedge funds.”  He was speaking to mutual fund executives at the time, but I doubt he knew just how right he was.


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