Thursday, November 29, 2012

"The Scent ... of a Casino" - Clinical Research Results as Fodder for Insider Trading

"The scent and smoke and sweat of a casino are nauseating at three in the morning. Then the soul-erosion produced by high gambling - a compost of greed and fear and nervous tension - becomes unbearable and the senses awake and revolt from it." - Ian Fleming.  Casino Royale.  1953

A major theme of this blog has been threats to the integrity of clinical research.  When I started out as a young naive academician in medicine, I viewed clinical research through the lens of evidence-based medicine, as primarily a means to develop better evidence to aid in the care of patients, and secondarily a way to advance science and public health.  Yet in the past 20 to 30 years, clinical research has become commercialized.  Now most randomized controlled clinical trials are done to support the licensing of drugs and devices for particular indications.  Furthermore, clinical research has become de facto a primary avenue of marketing of drugs and devices.  So we have discussed endlessly how clinical research has been manipulated by those with vested interests in selling drugs and devices, and may be suppressed when even such manipulation fails to produce results desired by commercial sponsors.

If that was not bad enough - and it is - now there is evidence that clinical research has become the roulette wheel in an investment casino.  This is the lesson provided by new US government charges that giant hedge fund SAC Capital used insider knowledge to trade drug company stocks.

Let me try to provide a narrative of the key elements of the case.

The Key Players

Matthew Martoma was a " former student at Harvard Law School, ... [who] co-wrote papers on medical ethics before seeking a business degree at Stanford University and joining a little-known Boston hedge fund."  Then, "in 2006, at age 32, Martoma made it to SAC Capital Advisors LP and gained the attention of the firm’s billionaire owner Steven A. Cohen."(1)

Dr Sidney Gilman is

an 80-year-old neurologist with expertise in neurodegenerative disorders, including Alzheimer’s disease. According to his biography on the University of Michigan website, Gilman first served on the faculty at Harvard and Columbia and then had a long and distinguished career at the University of Michigan, where he was the chair of the department of neurology for many years. He is a member of the Institute of Medicine of the National Academy of Sciences and a past president of the American Neurological Association. In other words, he’s a bigshot.

Gilman moonlighted as a consultant, working for an expert networking firm, where he provided advice to the financial industry (and which eventually led to the insider trading case), and for Elan Pharmaceuticals. In addition to his consulting for Elan, he also served as the chair of the Safety Monitoring Committee for a phase II clinical trial of a highly promising (at the time) Alzheimer’s drug, bapineuzumab, under development by Elan and Wyeth.(2)

The owner of SAC Capital, a hedge fund worth $14 billion, is Steven A Cohen, "a prodigious art collector, an investor in the New York Mets, a supporter of Mitt Romney’s presidential campaign."  His "career ... has reached mythic status on Wall Street. Over the last 20 years, Mr. Cohen has amassed a multibillion-dollar fortune by posting returns averaging 30 percent a year. SAC has grown into a firm with about 1,000 employees around the world."(3)

The Maneuver

Per the NY Times(4), 

The doctor met Martoma as a consultant for an expert- networking firm based in Manhattan and had sessions with Martoma from mid-2006 to July 2008, according to the government.

Gilman worked for Gerson Lehrman Group’s Scientific Advisory Board starting in 2002,... 

Also according to the NY Times(5)
Dr. Gilman’s consulting work for Mr. Martoma earned him about $108,000, according to court filings. Based in part on Dr. Gilman’s leaks about positive developments related to the clinical trials of a new Alzheimer’s drug, SAC accumulated a roughly $700 million position in the stocks of Wyeth and Elan, according to the government.

The S.E.C. said that the fund’s owner, Mr. Cohen, took a large position in Wyeth and Elan in his personal portfolio based on Mr. Martoma’s recommendation. Mr. Cohen maintained his holdings even though there was significant internal debate about the wisdom of such a large position in the drug makers, the government said.
Furthermore, per Larry Husten writing in Cardiobrief(2),

 While serving on the Safety Monitoring Committee of the trial, from the summer of 2006 through mid-July 2008, Gilman had access to the safety (but not the efficacy) data from the trial. Throughout this period he leaked the positive safety information to his contact at SAC (the enormous hedge fund), which then began to accumulate a large position in both Elan and Wyeth.

So, allegedly based on information from Dr Gilman, the high-ranking academic physician doubling as a data monitoring committee chair for a drug trial, paid for these services by Elan, SAC Capital and Mr Cohen made a large investment in Elan and Wyeth, the companies sponsoring the trial.

But then, again per Husten(2),

 Later in June, Elan chose Gilman to present the full trial data at ICAD. Gilman did not become privy to this data until the middle of July when Elan gave him the full results of the trial. The results, in sharp contrast to the earlier view in the press release, were decidedly negative, offering little hope that the drug would be considered effective. Gilman apparently understood this, because he immediately gave the results to the hedge fund, which then rapidly and dramatically reversed its long position on Wyeth and Elan.

Specifically, per the New York Times(5), after

Dr. Gilman told Mr. Martoma that patients were experiencing serious side effects, prosecutors say. Afterward, Mr. Martoma e-mailed Mr. Cohen, telling him 'it’s important' that they speak. They spoke on the phone for nearly 20 minutes, the government says, and Mr. Martoma told his boss that he was no longer 'comfortable' with the investments.

The following day, SAC reversed course. Mr. Cohen’s head trader sold the firm’s entire inventory of roughly 10.5 million shares of Elan and about seven million shares of Wyeth, the government said. Once it had dumped the shares, SAC built a short position in the two stocks, betting their value would drop.

According to the S.E.C., the trader, Mr. Cohen and Mr. Martoma kept the sales confidential. The trade, wrote the head trader in an e-mail to Mr. Cohen, 'was executed quietly and efficiently over a four-day period through algos and darkpools' — referring to trades using algorithms and to trading platforms that do not have the same reporting requirements as the stock exchanges — 'and booked into two firm accounts that have very limited viewing access.'

After the companies announced the results of the trials, Elan’s stock fell about 42 percent and Wyeth’s about 12 percent.

The trading allowed SAC to avoid about $194 million in losses and earn about $83 million in profits on Elan and Wyeth, according to prosecutors.

At the end of 2008, Mr. Martoma received a bonus of about $9.3 million, the S.E.C. said.

So, having bet heavily on Elan and Wyeth based on Dr Gilman's initial information that the trial was showing positive results, SAC Capital and Mr Cohen then bet heavily against these companies based on Dr Gilman's new information that the trial would end up not showing such results.  Because they had this information allegedly before it was made public, these bets yielded huge profits.  Mr Martoma, the conduit between SAC Capital and allegedly Mr Cohen, made millions.  Dr Gilman made over a hundred thousand.

The Charges

Per Bloomberg(4),

Martoma, 38, was accused by prosecutors in Manhattan federal court with playing a lead role in what they called the most lucrative insider-trading scheme in history, given the $276 million profit he allegedly helped the hedge fund achieve.
The government started off taking a tough approach, per the NY Times(5),

FBI agents arrested Mr. Martoma, 38, early Tuesday morning at his home in Boca Raton, Fla. He was released on bail after making an appearance in Federal District Court in West Palm Beach. Mr. Martoma, who has been unemployed since leaving SAC in 2010, is expected to appear in federal court in Manhattan on Monday and enter a plea.

 In addition, Dr Gilman, per Bloomberg(1), "has entered into a non- prosecution agreement with prosecutors in which he agreed to testify before a federal grand jury and to forfeit $186,761, money which he was paid by Elan for his consulting work."

Mr Cohen has not been charged.  However, according to John Cassidy writing in the New Yorker(6),

the complaints do assert that Cohen, identified as 'Portfolio Manager A,' personally authorized many of Martoma's trades, and pocketed the bulk of the profits they generated.  In a statement accompanying the indictment [US Attorney Preet] Bharara was careful to state that S.AC., and by extension Cohen, reaped enormous rewards from the criminal wrongdoing, even though they weren't being charged.
the complaints do assert that Cohen, identified as “Portfolio Manager A,” personally authorized many of Martoma’s trades, and pocketed the bulk of the profits they generated. In a statement accompanying the indictment, Bharara was careful to state that S.A.C., and by extension Cohen, reaped enormous rewards from the criminal wrongdoing, even though they weren’t being charged.

Read more:
In addition, there is now some likelihood that there will be legal actions against SAC Capital.  The company has reportedly received a "Wells notice" that the SEC is considering pursuing such action.  In addition, according to the New York Times(7), "an additional action against SAC, or even Mr. Cohen, could involve accusations of fraud based on the so-called control-person liability theory, meaning that it was in 'control' of Mr. Martoma when he engaged in insider trading."
the complaints do assert that Cohen, identified as “Portfolio Manager A,” personally authorized many of Martoma’s trades, and pocketed the bulk of the profits they generated. In a statement accompanying the indictment, Bharara was careful to state that S.A.C., and by extension Cohen, reaped enormous rewards from the criminal wrongdoing, even though they weren’t being charged.

Read more:


At one point, I would have simply regarded the trial of bapineuzumab as a clinical scientific experiment meant to determine if a promising new therapy would work for the important clinical problem of Alzheimer's disease, and incidentally as means to learn more about the biology of that disease.  More recently, I would have regarded the trial as primarily a means for Elan and Wyeth to persuade the US Food and Drug Administration to approve this drug as a treatment for this disease, and then if so, a means for these companies to market it.  I would have been skeptical about the value of the clinical evidence supplied by the trial to support use of this drug, but would not have dismissed this evidence out of hand.

Now it appears that a major role of this trial was to be a roulette wheel in a Wall Street casino.  Big bettors on this wheel included people who may have had advance knowledge about the slot in which the ball would land.

Ideally, clinical research ought to be done by people who have no particular interest in the results turning out one way or the other.  Obviously, clinical investigators as humans may have opinions about how studies might turn out.  However, they should not be in positions to gain or lose money according to the results, or to be intimidated by those with interests in having the studies obtain particular results. Our current system in which many clinical studies are funded by organizations with interests in how the results turn out has lead to numerous cases of manipulation of study results, and sometimes suppression of studies whose results could not be manipulated successfully in the desired direction.  Such threats to study integrity make it difficult to make the best clinical decisions for individual patients, distort health policy, and break the trust of patients who volunteered to participate in the studies.

Now it appears that short-term stock trading that bets on the results of clinical research, sometimes informed by insider information about these results, could be another powerful external influence on clinical research that could additionally threaten its integrity.  Furthermore, as we speculated seven years ago (see this post and links backward), fear of insider trading may be making clinical research more opaque, and this opacity may allow even more control of research by sponsors (companies funding it) rather than investigators.

We have previously suggested that real consideration ought to be given to taking clinical research out of the hands of organizations, particularly health care corporations, that have vested interests in the direction of the results.  Knowledge that clinical research is increasingly becoming a casino for stock traders and hedge funds, and that research results are becoming the stuff of insider trading should further prompt this consideration. 

1.  Burton K, Kishan S, Van Voris B. Cohen's 'Elan Guy' Martoma dropped ethics for hedge fund.  Bloomberg, Nov 23, 2012.  Link here.  
2.  Husten L. The doctor and the center of the insider trading scandal.  Cardiobrief, Nov 27, 2012.  Link here.
3.  Lattman P. S.E.C. weighs suit against SAC Capital.  New York Times, Nov 28, 2012.  Link here.
4.  Van Voris B, Hurtado P. Insider crackdown uses SAC manager in health-care pivot.  Bloomberg, Nov 21, 2012.  Link here.
5.  Lattman P. Insider inquiry inching closer to a billionaire.  New York Times, Nov 20, 2012.  Link here.
6.  Cassidy J. It's time for Obama to bite the hedge-fund sharks.  New Yorker, Nov 21, 2012.  Link here.
7.  Lattman P. S.E.C. weighs suit against SAC Capital.  New York Times, Nov 28, 2012.  Link here

1 comment:

Anonymous said...

And then we have this:

A doctor willing to experiment on illiterate immigrants for financial gain, is there a level in hell low enough for a person like this?

Steve Lucas