* SEC says Liangs traded in advance of 27 announcements
* Criminal conspiracy, fraud charges also filed
(Adds context, background, link to factbox)
By Jeremy Pelofsky and Lisa Richwine
WASHINGTON, March 29 A U.S. Food and Drug
Administration chemist and his son were charged with using
inside information about drug approvals to reap more than $3.6
million in profits, in an embarrassing blow to the health
The Securities and Exchange Commission charged Cheng Yi
Liang, 57, and his son Andrew, 25, on Tuesday with illegally
trading in advance of at least 27 public announcements about 19
publicly held companies.
"Liang's conduct was calculated, repeated and egregious.
Liang was a serial insider trader who violated the public's
trust for his own profit on numerous occasions," the SEC said
in its complaint filed in federal court in Maryland.
The Justice Department also charged them with conspiracy,
securities fraud and wire fraud for making $2.27 million in
trades involving five pharmaceutical companies between November
2007 and March 2011. The sum includes $1 million from the FDA's
approval of Vanda Pharmaceutical Inc's (VNDA.O) schizophrenia
drug Fanapt. For details on the trades, see [ID:nN29257575].
The Justice Department said its investigation was ongoing.
The men were arrested at their home in Gaithersburg,
Maryland, on Tuesday morning and made appearances in court.
The judge granted them conditional release pending trial.
It was not immediately clear if they had lawyers.
Information about prescription drugs can prompt big stock
swings and has been the subject of other insider trading cases.
However, one involving a government employee using his work for
such activities is rare.
Last year, a French doctor was charged by U.S. authorities
with tipping a hedge fund about negative results from a
clinical trial of a Human Genome Sciences Inc HGSI.O drug.
A major scandal involving FDA reviewers in the 1980s
resulted in convictions of agency employees for taking cash
payoffs and other gifts from generic drugmakers, but that case
did not involve insider trading.
FDA spokeswoman Meghan Scott said the agency was
cooperating with authorities on the insider trading case, but
could not give details on how it might affect agency policy.
"We will review the situation and take any appropriate
action," she said.
The SEC had to take measures to ward off employee
insider-trading two years ago after its inspector general
raised concerns that two SEC attorneys may have traded stocks
based on inside information.
Although no finding of insider trading was ever announced,
the SEC now uses a computer-based program to track all employee
HOME LINE OF CREDIT USED TO FUND TRADES
Liang has worked at the FDA since 1996 in the Office of New
Drug Quality Assessment and had access to the agency's internal
tracking system for new drug applications. He earned a salary
of $122,744 a year, according to a court document.
He was able to monitor confidential information about
whether and when the FDA was about to approve certain drug
applications. He and his son used several brokerage accounts to
execute trades, prosecutors said.
One account was in the name of Liang's 84-year-old mother,
who lived in China, according to the SEC.
They used a home equity line of credit taken out on their
primary house to fund the insider trading activity and used the
profits to buy another property, according to a court filing.
They also used the funds to buy cars, pay for travel and
pay credit card bills, the Justice Department said.
Investigators installed software on Liang's computer in
January that collected screen shots, revealing he was
collecting information about drug approvals, including for
Clinical Data Inc's CLDA.O anti-depressant Viibryd.
On Jan. 18, within minutes of reviewing an internal
document recommending approval, several accounts controlled by
Liang and his son bought nearly 5,000 shares of the stock,
according to prosecutors.
They eventually bought nearly 50,000 shares before the Jan.
21 announcement and made more than $379,000 in profit after the
stock rose some 67 percent on the approval news.
The cases are: USA v Cheng Liang, No. 11-mj-01236; USA v
Andrew Liang, No. 11-mj-01237 and SEC v Liang, No. 11-cv-00819
in U.S. District Court for the District of Maryland.
(Additional reporting by Sarah N. Lynch; editing by Gary Hill
and Andre Grenon)