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Kesselheim AS, Sinha MS, Joffe S. Physicians and Insider Trading. JAMA Intern Med. 2015;175(12):1955–1959. doi:10.1001/jamainternmed.2015.5610
Although insider trading is illegal, recent high-profile cases have involved physicians and scientists who are part of corporate governance or who have access to information about clinical trials of investigational products. Insider trading occurs when a person in possession of information that might affect the share price of a company’s stock uses that information to buy or sell securities—or supplies that information to others who buy or sell—when the person is expected to keep such information confidential. The input that physicians and scientists provide to business leaders can serve legitimate social functions, but insider trading threatens to undermine any positive outcomes of these relationships. We review insider-trading rules and consider approaches to securities fraud in the health care field. Given the magnitude of the potential financial rewards, the ease of concealing illegal conduct, and the absence of identifiable victims, the temptation for physicians and scientists to engage in insider trading will always be present. Minimizing the occurrence of insider trading will require robust education, strictly enforced contractual provisions, and selective prohibitions against high-risk conduct, such as participation in expert consulting networks and online physician forums, by those individuals with access to valuable inside information.
Health care in the United States is a big business, accounting for close to $2.9 trillion per year in spending, or 17.4% of the gross domestic product.1 It is also big finance. Close to one-third of all hedge fund holdings are in the health care sector, and a similar percentage of venture capital dollars are invested in health care.2 Many companies—including insurers, some health care systems, and pharmaceutical, biotechnology, and medical device manufacturers—sell shares to individuals and investment firms. Physicians may engage with publicly traded companies directly by sitting on their boards of directors, providing expert consultation, or by helping to run clinical trials, the findings from which may have substantial financial implications.3,4
These circumstances can make physicians and scientists privy to inside information.5-7Inside information is material, nonpublic information about a business entity that can influence the market price of its securities.8 Inside knowledge about the financial prospects of health care companies can be extremely valuable, particularly if the information predicts the success or failure of a revenue-generating health care product or relates to an impending business deal with major financial consequences.9 Insider trading occurs when a person in possession of information that might affect the share price of a company’s stock uses that information to buy or sell securities—or supplies that information to others who buy or sell—when the person is expected to keep such information confidential.
Insider trading is illegal. Nevertheless, it has long been documented in health care.10 Recently, there have been high-profile cases, including one involving a chemist regulator at the US Food and Drug Administration11 and another involving a renowned neurology professor at the University of Michigan.12 Given the visibility of such cases, we review insider-trading rules and consider approaches to securities fraud involving physicians and scientists.
Physicians may freely buy or sell securities based on clever predictions, assessments of companies to which they have no ties, or information that is already public. However, it is illegal to trade securities with material nonpublic information obtained in violation of a fiduciary duty or that has been improperly obtained.13-16 Classic securities fraud involves individuals who obtain inside information as company employees.13,17 Similar restrictions apply to anyone who learns such information about other companies—trading on that information can also be illegal if doing so violates a fiduciary duty to their company or another party. The material, nonpublic information can have either direct or indirect relation to the company it affects, and actually profiting from the insider trading is not needed to commit securities fraud.18
Rules also prevent physicians from revealing inside information to other people who trade on it, which can result in liability for both the person giving the information (the tipper) and the person receiving and trading on it (the tippee). Although formally, the tipper must violate a legal duty—typically, fiduciary duty to the tipper’s employer, but other legal duties of confidentiality can also trigger liability—and receive a personal benefit from providing the tip, the best practice would be to not provide such information rather than trying to navigate the possible boundaries of this rule. For the tippee to be held liable, a court must find that the tippee knew that the tipper violated a duty and received a personal benefit.19 Thus, while the law protects individuals who inadvertently trade on inside information, it would be unwise to rely on this protection because it remains a fluid area of the law.
Consultants and contractors who become privy to inside information during a short-term role with a company, including clinical researchers who are not employees, are considered temporary insiders.20 Temporary insiders are subject to the same rules as company management and full-time employees.21
Insider trading liability can arise from other relationships as well. In a prominent legal case, a psychiatrist obtained information from a patient who was the wife of a financier seeking to become chief executive officer of a bank and traded on that information. The court held that such a misappropriation of information violated a relationship of trust and confidence.22 Another special set of circumstances involves nonpublic information regarding a tender offer, which occurs when one party attempts to purchase a large amount of another company’s publicly traded securities; trading on such information is also illegal, and in such cases, the scope of liability is even wider.23-26
Penalties for those convicted of insider trading include return of any profits accrued in the 12 months prior to prosecution to the respective companies plus interest.27 Civil monetary penalties are usually levied as well, and cases of substantial illicit gain can even lead to imprisonment.28 Greater penalties can be handed down if the accused served as an officer or director of a public company or was affiliated with a brokerage firm or an investment adviser.29
A review of news media reports from 2008 through 2012 relating to insider trading demonstrates 2 notable ways that physicians and scientists may violate insider trading laws and rules in the health care market (Box). First, physicians who are members of companies’ boards of directors have been investigated for sharing inside information about pending mergers and acquisitions, including tender offers, with substantial financial implications for their companies. Second, individuals involved in clinical trials of investigational products have been prosecuted for divulging inside information about ongoing trials that could affect the price of a company’s securities. Illegal activity with regard to trials can involve purchasing stocks before public release of a positive result (profit gained) or selling existing holdings before release of negative news (loss averted).
Physicians Involved in Corporate Governance
Cardiologist Mammen Zachariah reportedly received confidential information regarding the pending acquisition of IVAX by Teva Pharmaceutical Industries (as well as information about another, non–health care company) from his physician brother, who served on the board of directors of IVAX.30 Without admitting or denying the allegations, he returned his profits and paid a monetary fine for a total of about $300 000 (his brother was later exonerated).31 (Settlement year, 2009.)
Radiologist Apparao Mukkamala served as board chairman of American Physicians Capital, a publicly traded medical liability insurance company.32 When the company was actively negotiating a potential sale, Mukkamala and 4 family members and friends allegedly purchased $2.2 million in securities, reaping over $623 000 in profits.32 According to the US Securities and Exchange Commission (SEC) complaint, Mukkamala pursued this scheme despite American Physicians Capital having implemented an industry-standard stock-trading ban for all board members 3 months prior to the purchases, far longer than the required 3-business-day blackout period in place since 2003.32 Without admitting or denying the allegations, Mukkamala and his codefendants were penalized $1.9 million, and Mukkamala agreed to refrain from future participation on boards of directors of any public company.33 (Settlement year, 2012.)
Cardiologist Bobby Khan was the founder and a board member of InVasc Therapeutics, a small, privately held biopharmaceutical company.34 A professional colleague who sat on his advisory board was a senior advisor at Sciele Pharma, a publicly traded drug company that was targeted for acquisition by Japanese pharmaceutical company Shionogi & Co.34 According to the SEC complaint, after his colleague shared word of Sciele’s potential acquisition, Khan purchased approximately $75 000 in shares of Sciele and made over $45 000 after selling his shares once the acquisition was complete.34 Without admitting or denying the allegations, Khan returned his profits (plus interest) and paid a civil monetary penalty, for a total of approximately $100 000.35 (Settlement year, 2012.)
Disclosure of Information From Clinical Trials
Sidney Gilman, a neurologist at the University of Michigan, shared nonpublic information about negative safety outcomes from an ongoing clinical trial of bapineuzumab, an antiamyloid monoclonal antibody and an experimental drug for Alzheimer disease with a hedge fund manager.12 The manager sold his company’s positions in Elan and Wyeth, the biopharmaceutical firms that were sponsoring the trial, averting millions of dollars in losses when the trials were later stopped.12 (Settlement year, 2013.)
Chip Skowron was managing director at a financial firm, FrontPoint Partners, and had oversight of health care–related hedge funds.36 Yves Benhamou, a French physician and hepatitis C expert, was involved in late-stage clinical trials of an investigational hepatitis C treatment manufactured by Novartis and Human Genome Sciences.36 Skowron and Benhamou met through an expert consulting network, GuidePoint Global, which provides expert consultations and research for corporate clients.37 In addition to GuidePoint-mediated interactions, Skowron allegedly arranged side deals with Benhamou that included thousands of dollars in cash and reimbursement for lavish hotel stays and vacations.38 When 2 participants in Benhamou’s clinical trial developed interstitial lung disease, the data safety monitoring board prepared to discontinue the trial, and Benhamou shared these nonpublic negative results with Skowron, who sold all 6 million shares of Human Genome Sciences held by his hedge funds in the days leading up to the press release announcing the trial’s suspension.36,38 When the stock lost 44% of its value, FrontPoint avoided losses of approximately $30 million. Pleading guilty, Benhamou was required to pay approximately $6 million in restitution but was not imprisoned because he cooperated with the SEC during the investigation.38 Skowron was sentenced to 5 years in prison in addition to forfeiting $31 million received in compensation from his employer.39 (Judgment year, 2011.)
Perhaps the most widely reported recent case, which became public in 2012, involved University of Michigan neurology professor Sidney Gilman, who started consulting with Wall Street clients when he was in his late 60s.12,40 Gilman ultimately established paid consulting arrangements with more than 40 clients at around $1000 per hour, reportedly leading to over $100 000 a year in revenue and luxuries like limousines, hotel suites, and private jets.41 Gilman obtained many of his clients—including Mathew Martoma of CR Intrinsic, a subsidiary of hedge fund management group SAC Capital Advisors—from the Gerson Lehrman Group, a networking firm that connects so-called thought leaders to businesses seeking expert input.12 Martoma sought information on bapineuzumab, an investigational antiamyloid monoclonal antibody for Alzheimer disease, which was being codeveloped by biopharmaceutical companies Elan and Wyeth.40 Gilman served as chair of the data safety monitoring board (DSMB) for the phase 2 clinical trial of the drug.40 The 2 met frequently to discuss bapineuzumab, often enough that Gilman apparently at one point suggested that Martoma start reporting to Gerson Lehrman that they were discussing other topics.12
Gilman provided Martoma with information that included nonpublic bapineuzumab safety outcomes. He shared the data prior to a DSMB meeting to determine the fate of the phase 2 trial, which showed no efficacy compared with placebo and no dose-response effect.42,43 Martoma acted on the information, advising SAC Capital to liquidate $700 million in existing positions in Elan and Wyeth, avoiding $194 million in losses, and to take short positions that generated $82 million in profits.44 When the trial was stopped, Elan stock fell 42%, and Wyeth stock fell 12%.45 Combined net gains and avoided losses for CR Intrinsic and SAC Capital amounted to $276 million, the largest insider trading case ever charged by government investigators at the time.44 Gilman cooperated with the investigation and returned his profits from CR Intrinsic, thus avoiding a potential 16- to 19-year prison term.45 Martoma was sentenced to 9 years in prison and forfeited the $9.38 million bonus that SAC Capital had given him for his work prior to the US Securities and Exchange Commission investigation.46
Physicians and scientists can play important roles in for-profit health care companies, both internally as board members and externally as consultants or by conducting clinical research. However, physicians and scientists who work with industry and have access to insider information must understand that insider trading is illegal and that both acting on insider information as well as providing it to others can result in criminal and civil charges. Board members must strictly avoid discussion of high-risk topics such as mergers, acquisitions, earnings reports, and results of audits prior to their public release. Physicians should realize that even if they do not directly buy or sell shares based on nonpublic information, if someone else does, that person as well as the physician or researcher who provided the information can be liable. As the cases show, the consequences of disclosing clinical trial results to those seeking a financial edge can be substantial.
Although a matter of speculation, physicians and scientists involved in these reported cases may have realized what they were doing was wrong.30,32,34,36,45 Some of them attempted to conceal their business dealings or violated explicit rules established by their companies. These highly publicized cases, however, may represent only a fraction of insider trading behavior. Studies examining stock prices before and after public disclosure of phase 3 clinical trial results found statistically significant increases in stock prices prior to positive news and decreases in stock prices prior to negative announcements.47-49 These findings suggest that insider trading does occur in the biopharmaceutical industry. Though it is unclear who is responsible for these anticipatory trends in stock prices, investors have publicly remarked about the ease with which information can be pried from unsuspecting physicians.50
Physicians and scientists who interact with industry and have access to inside information should understand the applicable legal standards for insider trading. Companies that hire outside physicians or scientists as board members, consultants, or clinical trial investigators should assume primary responsibility, with education and training integrated into existing orientation programs on confidentiality and nondisclosure. In our view, companies are best placed to fulfill this responsibility because they have the requisite legal expertise, can standardize training, and have legal obligations to shareholders and others whose interests might be harmed by insider trading activities. Such programs are likely more common for incoming directors or senior employees than for temporary insiders such as consultants or physicians who perform research under contracts. A trade group, such as the Pharmaceutical Research and Manufacturers of America, could also organize an industrywide educational module about nondisclosure rules relevant to insider trading. Such a module might be made freely available to physicians and scientists, in the same manner as online continuing medical education, with successful completion a requirement of the contracting process.
Leaders of academic medical centers frequently serve on the boards of large pharmaceutical companies.51 Although academic medical centers could provide educational programs about insider trading for their employees and faculty, such programs are unlikely to reach the many physicians and scientists who collaborate with publicly traded companies but are not part of academia. In addition, because service on a board of directors or as a consultant (but not as a clinical trial investigator) is typically a private-party agreement between a physician and a company and does not involve the physician’s employer, academic institutions are arguably not directly responsible for educating their employees about the legal risks associated with these activities.52
Considering the allure of financial incentives that can be offered to physicians, enhanced education will likely not be enough. Well-established and highly visible companies that provide industry with access to expert consultants, like GuidePoint and Gerson Lehrman, or publicly visible physician social networks like Sermo, create opportunities for disclosure of inside information, which could be inadvertent or deliberate.50 Such networks already provide members with some education about inside information; Gerson Lehrman, for example, requires its affiliated consultants to complete a tutorial specific to the health care sector.53 After the Gilman episode, the University of Michigan went further, barring faculty and staff from entering in consulting arrangements with expert advisory panels that match scientific experts with hedge fund managers or brokerage firms.54 We are unaware of other academic medical centers with such a policy.
Relying on top-down rules may not suffice, however. Given the risks of even inadvertent disclosure, physicians and scientists who serve on boards of directors or scientific advisory boards for health care companies, who consult for industry, or who participate in clinical research—including as principal investigators, site directors, or DSMB members—should not participate in expert consulting networks. One way to promote compliance with such a rule would be for companies to include it prominently in legal agreements with physicians with whom they contract to run a trial, to provide consulting services, or to join a board.
Given the magnitude of the potential financial rewards, the ease of concealing illegal conduct, and the absence of identifiable victims, the temptation for physicians and scientists to engage in insider trading will always be present. The input that physicians and scientists provide to business leaders can serve legitimate social functions, but insider trading threatens to undermine any positive outcomes of these relationships. Minimizing the occurrence of insider trading will require robust education, strictly enforced contractual provisions, and selective prohibitions against high-risk conduct by those individuals with access to valuable inside information.
Accepted for Publication: August 25, 2015.
Corresponding Author: Aaron S. Kesselheim, MD, JD, MPH, 1620 Tremont St, Ste 3030, Boston, MA 02120 (firstname.lastname@example.org).
Published Online: October 12, 2015. doi:10.1001/jamainternmed.2015.5610.
Author Contributions: Dr Kesselheim had full access to all of the data in the study and takes responsibility for the integrity of the data and the accuracy of the data analysis.
Study concept and design: Kesselheim, Sinha, Joffe.
Acquisition, analysis, or interpretation of data: Kesselheim, Sinha, Joffe.
Drafting of the manuscript: Kesselheim, Sinha.
Critical revision of the manuscript for important intellectual content: Kesselheim, Sinha, Joffe.
Obtained funding: Kesselheim.
Study supervision: Kesselheim.
Conflict of Interest Disclosures: Dr Joffe was a paid member of a data monitoring committee for Genzyme/Sanofi until November 2012.
Funding/Support: Dr Kesselheim is a Greenwall Faculty Scholar in Bioethics.
Role of the Funder/Sponsor: The Greenwall Foundation had no role in the design and conduct of the study; collection, management, analysis, and interpretation of the data; preparation, review, or approval of the manuscript; and decision to submit the manuscript for publication.
Additional Contributions: The authors would like to thank Kevin Outterson, JD, LLM, Michelle Mello, JD, PhD, and Michael Klausner, JD, for their comments on an earlier draft of this article. They received no compensation for their contributions.
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