By Jeremy Pelofsky and Lisa Richwine
WASHINGTON (Reuters) - 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 industry regulator.
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 schizophrenia drug Fanapt.
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 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 stock holdings.
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 anti-depressant Viibryd.
On January 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 January 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)