A hedge fund manager of Indian origin was charged on Wednesday with trading on confidential tips about drug approvals, in one of the biggest insider trading cases since a 2014 court ruling made it harder for U.S. prosecutors to pursue them.
U.S. Attorney Preet Bharara in Manhattan accused Sanjay Valvani of Visium Asset Management LP of fraudulently making $25 million by gaining advance word about U.S. Food and Drug Administration approvals of generic drug applications.
Mr. Valvani is the latest person of Indian origin to face insider trading charges. Rajat Gupta, former CEO of the consultancy company, McKinsey, is the best known of them and was >convicted in 2012 on insider trading with Raj Rajaratnam, a hedge fund operator of Sri Lankan origin. Anil Kumar, a former McKinsey employee, pleaded guilty in the same case.
Prosecutors said the inside information was provided by Gordon Johnston, a consultant who got tips from a friend and former FDA colleague still working at the agency.
Mr. Valvani passed some of these tips to Christopher Plaford, then a Visium portfolio manager, who made his own illegal trades, prosecutors said.
“Sadly these are schemes we see time and time again, where lies and use of non-public information profits those conducting the crimes, and everyday investors lose out,” FBI Assistant Director-in-Charge Diego Rodriguez said in a statement.
Prosecutors also accused Plaford and Stefan Lumiere, another former Visium portfolio manager, of fraudulently inflating the value and liquidity of a bond fund they oversaw by getting “sham” price quotations from brokers, in an effort to prevent investors from demanding their money back.
‘An innocent man’
Mr. Bharara has won dozens of insider trading convictions over the last several years, including of Rajaratnam and Steven A. Cohen’s firm SAC Capital Advisors.
But such cases became tougher to prosecute in December 2014 when a federal appeals court in Manhattan voided his convictions of hedge fund managers Todd Newman and Anthony Chiasson.
That court said prosecutors needed to show that traders knew the people who provided inside tips received something consequential in exchange.
Barry Berke, a lawyer for Mr. Valvani, in a statement accused Mr. Bharara of “stretching the facts and law to try to transform entirely innocent trading decisions into a crime”.
Mr. Berke also called Mr. Valvani “an innocent man whose investment decisions were always based on rigorous and entirely appropriate research and analysis”.
Mr. Valvani, 44, of Brooklyn, New York, pleaded not guilty in the U.S. District Court in Manhattan to five counts including securities fraud, wire fraud and conspiracy. He was freed on $5 million bond secured by his home.
Mr. Lumiere, 45, of New York, was charged with securities fraud, wire fraud and conspiracy, and freed on $1 million bond after a brief court appearance. He did not enter a plea.
Mr. Johnston, 64, of Olney, Maryland, and Plaford, 38, of Bedford, New York, pleaded guilty earlier this month to related charges and are cooperating with prosecutors.
The U.S. Securities and Exchange Commission filed civil charges against all four defendants. It said Mr. Valvani’s illegal profit, including from other trades, was $32 million.
Mr. Lumiere’s lawyer Eric Creizman, Plaford’s lawyer David Smith and Johnston’s lawyer Christopher Mead declined to comment.
A Momenta tip
Founded in 2005 by Jason Gottlieb, who has a medical degree, Visium oversees about $7 billion of assets. Last month, The Wall Street Journal said investors asked to redeem about $1.5 billion after news of the federal probes surfaced.
The Visium Global multi-strategy fund gained 10.2 per cent in 2015, and the Visium Balanced healthcare fund rose 5.6 per cent.
“I am deeply saddened by today’s events,” Mr. Gottlieb said in an email. Visium was not charged.
Mr. Valvani’s alleged scheme ran from 2005 to 2011, centred on “political intelligence” that Mr. Johnston got from his former colleague at the FDA, where he was once deputy director of the Office of Generic Drugs.
According to court papers, Visium paid Mr. Johnston hundreds of thousands of dollars over the years, but Mr. Valvani asked its chief financial officer in a January 6, 2010 email to award a raise.
Mr. Johnston “is without question the most valuable consultant I’ve ever worked with and I’m pushing to reinforce the value of the relationship and encourage him to continue to go above and beyond for our team,” Mr. Valvani allegedly wrote.
Prosecutors said he did just that, sending tips about Momenta Pharmaceuticals’s effort to win FDA approval for the first generic equivalent to Sanofi’s Lovenox, for treating deep vein thrombosis.
After Momenta won approval in July 2010, causing its stock to rise 82 per cent in one day, Mr. Valvani made $25 million from selling his Momenta stock, and closing bets that Sanofi stock would fall because of the new competition, prosecutors said.
The SEC said Mr. Valvani reaped another $7 million by later selling Momenta short, based on tips that Watson Pharmaceuticals Inc might also win approval for a Lovenox generic.
These trades helped Mr. Valvani receive bonuses topping $11.5 million in 2010 and $10.5 million in 2011, dwarfing his $2.5 million bonus in 2009, the SEC said.
Prosecutors said Mr. Valvani called Mr. Johnston in January 2011 to end their relationship, “in the wake of news reports of insider trading investigations.”
