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Investigation and White Collar Defense

Last week, the U.S. Attorney's Office for the Southern District of New York indicted Congressman Chris Collins (R-NY) on insider trading charges. Collins, who was on the board of an Australian drug company, tipped off family and friends who had invested in the company that the company's main drug had failed a drug trial. He has since suspended his reelection campaign. While the case is in many ways a prototypical insider trading case, it also serves as a cautionary reminder for those in the pharmaceutical industry of the paramount importance of maintaining the confidentiality of material non-public information, such as the results of a clinical drug trial that has not yet been made public.

Collins sat on the board of Innate, an Australian company that was in the approval process for a multiple sclerosis drug. Because the drug stood to be the company's primary source of revenue, the company's stock value was dependent on passing the trial. In June 2017, drug trial administrators made Innate's CEO aware that trials showed the drug was ineffective in treating MS. Just before the results were made public, the company requested the Australian Stock Exchange (ASX) halt trading of its shares, as is often the case when companies learn of major news, and the ASX stopped trading shares of Innate for 5 days. However, while trading stopped on the Australian market, it continued trading on the American over-the-counter (OTC) market. During that period, the CEO then emailed members of the board of directors, including Collins, to inform them of the results of the trial.

As alleged in the indictment, within hours of learning of the failed trial, Collins passed on the information to his son, another investor in the company, who sold off a majority of his shares. The son also passed the information on to a number of family members and friends who had invested in Innate, almost all of whom sold off their shares on the American OTC market in the 5 days prior to the information becoming public but after receiving the tip from Collins. Once the information became public, Innate stock lost 92% of its value. Collins' family and friends who sold off their shares were able to avoid thousands (and in the case of his son, hundreds of thousands) of dollars in losses.

Notably, the Collins case is not the first instance where the Southern District of New York has brought an insider trading case relating to illegal trading on non-public information about a clinical drug trial. Two years ago, Matthew Martoma, a hedge fund trader, was sentenced to nine years' imprisonment for insider trading. Martoma was convicted after trial on allegations similar to those pending against Representative Collins. Martoma obtained non-public information about the results of the clinical trial of an Alzheimer's drug and passed that information along to his employer, which then sold its shares in two pharmaceutical companies based on Martoma's tip, avoiding significant losses.

Representative Collins' case and Martoma's case are a reflection of DOJ's commitment to focusing specifically on insider cases brought against individuals trading on information related to drug trial results. Such results fall within the heartland of material non-public information – information that has the potential to dramatically increase or wipe out value in an instant. For this reason, it is rife with opportunity for improper trading. While pharmaceutical companies may have mechanisms in place to prevent all trading under certain circumstances, and confidentiality provisions that govern proprietary information like trial results, in-house counsel should be proactive about reminding employees to maintain the confidentiality of such material.