Insider trading on AD trial

[neglect]

---

Members do not see this ad.

For those who have not been following this, we have a cautionary tale.

If you can't be bothered, briefly, a finance guy named Mathew Martoma is accused of befriending a famous elder statesman of neurology, Sid Gilman, who was the head of the DSMC for Elan's phase II AD study of Bapi. Although the data showed some signal (a phase III was done and it was a large negative trial), the overall trial was disappointing relative to expectations. Sid Gilman and another doctor, Joel Ross, knew about the data before it was released into the general public and told Martoma. Martoma worked for a hedge fund named SAC capital (which recently settled a civil suit for nearly 2 billion dollars for this sort of stuff), and told his bosses. Between shorting the stock and selling their positions, they avoided losses and made a total of 1/3 a billion dollars.

That's the story. I've been very interested in this case because it shows the absolute worst in humans when medicine crosses into business, and the unseemly behavior of some who sit at that intersection. One must be very careful to avoid all sorts of emotional and fiscal temptations professionally and personally. Of course, not all of us will ever face temptations to this degree. But it seems to me that you've got to vaccinate yourself to red line the kinds of behavior you'd never do. Because at the moment when it could have mattered it must have been the easiest thing in the world for Drs. Gilman and Ross to take that call. Martoma seems to have a much more sinister part to play. He didn't red line anything. His was not a moment of indiscretion and a single bad choice.

It will be interesting to watch this trial unfold. Better than a Law and Order episode to me. Personally, I don't see any possible way for Martoma to get away with this and I cannot believe he didn't flip on his boss. He seems to be delusional or stupid enough to believe his lawyers.

 

[typhoonegator]

Yeah, it's pretty terrible. The thing with these social engineering cases is that these folks have no power unless you give it to them. Many physicians, even "elder statesmen" have a naive understanding of the financial world. We're poorly socialized to this sort of thing. The SEC watches medical industry-financial interactions closely because of how much money is at stake and how susceptible the sector is to insider trading. In this case, chairing the DSMC for a make-or-break trial for Elan is not much different than being the CEO of Elan. In either case, privileged information with actionable financial impact on a publicly traded company cannot be divulged to outside sources unless it is done publicly. It is a major pillar of a free market system, and one that the SEC takes seriously. A big hedge fund might see this as the cost of doing business and a calculated risk. After all, it's not like insider trading always gets caught, and they might be doing this with three other companies the same week. But for the academics involved, the ethical implications are enormous, something the managers of a hedge fund are not interested in (not a knock against them, they're here to make money for their investors and represent them that way).

 

[neglect]

This is like a discussion on W. Bush. Was he dangerously stupid/incompetent/incurious or dangerously evil?

One might see an elderly man with a naive understanding of the financial world, and the millions of dollars of pressure on people like Martoma, perhaps combined with an over-appreciation of Martoma's moral compass, yielding a mistaken disclosure. Gilman was dangerously naive (a kinder word than stupid/incurious) who met Martoma, who is dangerously evil. But I think that's not the only force at play. Like Bush, I think there's a bit of both here. Gilman was paid more than a hundred thousand dollars over the previous two years for his opinions. That's a lot of good will, but nothing like Martoma's 10 million dollar bonus. There were >100,000 reasons to overlook the moral hazards of speaking with Martoma. Which, again, is why we have to look at this case. We have to vaccinate ourselves so as to be incapable of these offenses.

And there's another thing I was thinking about. Every investigator meeting I've ever been to has had a "confidential" stamped to every slide - stupid since many slides are from public domain research. And I sign so many non-disclosures I barely read them. I suspect this universality waters down the very real instances when there's something non-public, which stands to make someone like Martoma and his boss millions in risk free and unearned wealth.

Trial starts Monday.

 

[typhoonegator]

When a publicly traded company has assets on the line whose valuation could change based on the provision of information, all data should be considered confidential unless it appears in a press release or publication. I don't know if members of the DSMB thought they were being nice to this hedge fund guy, or if they were expecting something more tangible for their information brokering. It's one thing to have a conflict of interest with the biotech company funding the study that you sit on the DSMB for, but it's another thing entirely to provide confidential information to a third party whose only stake is based on ownership of stock in a publicly traded company. Feeling compromised because Elan is paying you to be an expert in their trial is one thing, but going out of your way to give SAC Capital privileged information sure is hard to defend. It's sad, really. I hope there is something more to the story.

 

[neglect]

Interesting things that I have learned:

1. Martoma was kicked out of law school for falsifying grades on transcript. If the jury hears that, the jig is up right there. What kind of absolute ***** falsifies grades on their transcript? The answer is the exact same kind of ***** (with an exactly proportional moral compass) who pleads not guilty to a crime years after falsifying grades.

2. Martoma cannot use his boss' testimony. But his boss said that he traded very much based on the information Martoma gave him, and got from insider dealings. Again, this is very horrible for their case.

 

[dl2dp2]

Legal regulations often don't work especially when such large sums of money are involved. And inside trading litigations are very complex, because often it's unclear what is "inside" and what is "outside", and the standard for criminal action is very confusing. IMHO the regulation should aim to make it more difficult to trade on inside information rather than to punish it when it happened. For instance, in the pharma industry, one could consider imposing a law that would require an immediate public release at the end of the trial all data relating to the trial. The industry is moving somewhere in this direction, but they (i.e. Norvatis) still want the data to be published first in a primary article as a way to mitigate and spin it in the direction that they want.

Also, is there evidence that inside trading actually hurts the economy from a policy perspective? Information asymmetry makes it more difficult to achieve optimality using market force alone, but it's unclear how it relates to a particular legal entity. For instance, if you bring in civil law concepts, inside trading for SAC brings in billions of dollars for its investors, who is it hurting? Who has the standing to sue for tort? I don't know. It seems like a victimless crime.

http://dealbook.nytimes.com/2011/08/10/how-serious-a-crime-is-insider-trading/

To see the various perspectives:

http://insidertrading.procon.org/view.answers.php?questionID=001111

A more interesting question is, currently trial investigators are given a fixed salary for their work running the trial. However, they are the first people to know the results. Should they therefore be able to AUCTION their information in some way? It seems unethical, but there's no obvious legal argument against setting this information free on the market if it's actually worth something, instead of having essentially transfer of funds. It's almost similar to a technology transfer issue. The university and the investigators who conducted the study have privileged information, and they should have a CUT in the possible profit derived from the priority release of that information, just as if someone discovered a patentable technology, they would be able to get a cut should a private company LICENSE this technology. The hedgefund should LICENSE trial results in a similar way.

 

[neglect]

Legal regulations often don't work especially when such large sums of money are involved. And inside trading litigations are very complex, because often it's unclear what is "inside" and what is "outside", and the standard for criminal action is very confusing. IMHO the regulation should aim to make it more difficult to trade on inside information rather than to punish it when it happened. For instance, in the pharma industry, one could consider imposing a law that would require an immediate public release at the end of the trial all data relating to the trial. The industry is moving somewhere in this direction, but they (i.e. Norvatis) still want the data to be published first in a primary article as a way to mitigate and spin it in the direction that they want.

Also, is there evidence that inside trading actually hurts the economy from a policy perspective? Information asymmetry makes it more difficult to achieve optimality using market force alone, but it's unclear how it relates to a particular legal entity. For instance, if you bring in civil law concepts, inside trading for SAC brings in billions of dollars for its investors, who is it hurting? Who has the standing to sue for tort? I don't know. It seems like a victimless crime.

You, sir, are a *****.

Getting ahead of the information that a stock is going to tank by using insider info does two things: it directly screws those who didn't engage in this crime and it decreases confidence in the markets as a whole. Both form a good reason for insider trading to be illegal. But even more than that, no matter how big the deal, all business transactions are protected by law. Without that, it's Game of Thrones, chaos.

The market is a game. Games have rules. To play the game you need the rules. Some of them might be silly. Some rules might not get enforced. Hey, Cohen is still free, so we really see that some rules do not get enforced.

But rules still stand. In the market, the rules are also called laws. If you break them, there are a variety of punishments, just like a real game.
What Martoma did was illegal. He broke the rules of the game. He got Gilman to tell him confidential information. It was about on the level of Lance Armstrong - and that's really saying something - both cheated in the system, one broke the rules of a sport, the other broke the laws of the land. See also Jonah Lehrer. It was way more dishonest than moving heroin, a crime for which poor black people get imprisoned for decades without much handwringing or million dollar lawyers.

A more interesting question is, currently trial investigators are given a fixed salary for their work running the trial. However, they are the first people to know the results. Should they therefore be able to AUCTION their information in some way? It seems unethical, but there's no obvious legal argument against setting this information free on the market if it's actually worth something, instead of having essentially transfer of funds. It's almost similar to a technology transfer issue. The university and the investigators who conducted the study have privileged information, and they should have a CUT in the possible profit derived from the priority release of that information, just as if someone discovered a patentable technology, they would be able to get a cut should a private company LICENSE this technology. The hedgefund should LICENSE trial results in a similar way.

More stupidity. Plus you're stupidly flat wrong. The actual trial investigators aren't the first people to know the results. The results are kept from them. The first people to know are the stats people on the DSMC's and in the industry. They are paid for their work and told they should not disclose the information because it is: against the law, bad for the company, immoral!

Also, it seems unethical because it IS unethical. It is the height of unethical behavior. Justifications for sociopathy fall flat. I worry about you, your moral compass and your future. You need to do some serious reflection about just what sort of human you are. And if you are, in fact, a sociopath with no qualms about breaking the law, then bad luck to you. You will be found out. You will be exposed like Martoma and Steinberg before him, your ill gotten riches stripped, your name equated with all that's corrupt, rotten, piggishly greedy, and repulsive.

 

[dl2dp2]

You, sir, are a *****.

Hmm...You can call me names, though this probably violates terms of conditions of SDN.

Also, it seems unethical because it IS unethical. It is the height of unethical behavior. Justifications for sociopathy fall flat. I worry about you, your moral compass and your future. You need to do some serious reflection about just what sort of human you are. And if you are, in fact, a sociopath with no qualms about breaking the law, then bad luck to you. You will be found out. You will be exposed like Martoma and Steinberg before him, your ill gotten riches stripped, your name equated with all that's corrupt, rotten, piggishly greedy, and repulsive.

Sure DSMC knows the results before the trial investigators, but the trial investigators know the results before publication. This is a detail. The question is whether whoever have trial results should be able to benefit from releasing that information ahead of everyone else to specific agents (i.e. finance) to derive a profit. Other than calling me names you can't really name any ethical argument against it except that as I said, it "feels" unethical...vaguely. And currently illegal.

Laws are not necessarily benchmarks for ethical behavior. Slavery was at a time law of the land. As were criminal charges against sodomy. And in current times, lengthy and unjust prison sentences for drug related charges are anything but moral. Games have rules but it doesn't mean that existing rules are sensible or fair to every player. If you look into the history of insider trading law, you'll discover that these laws were in fact enacted to protect the profit margin of manufacturers against speculation. I.e., the ones most directly harmed are the pharmaceutical companies. Unless you are directly betting against SAC Capitals, it's hard to demonstrate that you are hurt by whatever they are doing. Certainly any kind of civil tort wouldn't stand scrutiny. A logical argument can be made that if inside trading was used to benefit HOSPITALS or RESEARCH INSTITUTIONS, and perhaps even the government, through a protected mechanism of priority release, it would be UNETHICAL to NOT do it. Unfortunately our current intellectual property law is not yet sophisticated enough to set this system to make this happen. All I'm saying is that criminalizing insider trading is a very clumsy way for the government to regulate information asymmetry and tax the financial service industry.

I'm sorry that your view of what's right and wrong and how to enact the best public policy relating to pharmaceutical development is not as nuanced and sophisticated as it could have been.

 

[typhoonegator]

OK, team. This is a very useful and fruitful discussion, but without the name calling. Yes, it is a TOS violation to call people names here. Let's keep the level of discourse elevated or I'm going to have to close the thread.

 

[neglect]

Sure DSMC knows the results before the trial investigators, but the trial investigators know the results before publication.

Wow. You doubled down on such a bad bet!? I'm at a bit of a loss. Since you did, and are incapable of addressing the points I made above, I'm not going to speak to you as much as to other readers. I strongly urge you to reflect on my words in a private place and to NEVER act on the rationalizations you give. For the rest of everyone, I think it is important to recognize this as such.

Let's start with the above statement. You are clearly not a trial investigator. There are two things you got wrong within a single sentence. 1. Trial investigators are blinded. They don't know the results until the study is either: found to be futile/harmful and thus pulled, or done and all the results in, cleared, summed. 2. Even many among the least sophisticated and nuanced doctors know that trial results are publicized many months prior to publication. Publication comes many months later.

These errors reflect profound misunderstandings. Let's continue.

This is a detail. The question is whether whoever have trial results should be able to benefit from releasing that information ahead of everyone else to specific agents (i.e. finance) to derive a profit. Other than calling me names you can't really name any ethical argument against it except that as I said, it "feels" unethical...vaguely. And currently illegal.

Yes. It is unethical and illegal. In this case they are the same. Again, to everyone else reading: insider trading is stealing money from everyone who doesn't have that information to make educated picks. If you consider the actual function of the US financial system in relation to biotech it is this: to fund innovation. This system works by taking risks on things like Elan's monoclonal antibody, Bapi, as a disease modifying treatment for AD. The payoff could have been huge. This system does not work if hedge funds get insider information about trial results prior to the formal announcements. Because who then would actually take an honest risk?

Of course, I also said this:

Getting ahead of the information that a stock is going to tank by using insider info does two things: it directly screws those who didn't engage in this crime and it decreases confidence in the markets as a whole. Both form a good reason for insider trading to be illegal. But even more than that, no matter how big the deal, all business transactions are protected by law. Without that, it's Game of Thrones, chaos.

None of these points are addressed. Instead, Sluox gives us the following ramble:

Laws are not necessarily benchmarks for ethical behavior. Slavery was at a time law of the land. As were criminal charges against sodomy. And in current times, lengthy and unjust prison sentences for drug related charges are anything but moral. Games have rules but it doesn't mean that existing rules are sensible or fair to every player. If you look into the history of insider trading law, you'll discover that these laws were in fact enacted to protect the profit margin of manufacturers against speculation. I.e., the ones most directly harmed are the pharmaceutical companies. Unless you are directly betting against SAC Capitals, it's hard to demonstrate that you are hurt by whatever they are doing. Certainly any kind of civil tort wouldn't stand scrutiny. A logical argument can be made that if inside trading was used to benefit HOSPITALS or RESEARCH INSTITUTIONS, and perhaps even the government, through a protected mechanism of priority release, it would be UNETHICAL to NOT do it. Unfortunately our current intellectual property law is not yet sophisticated enough to set this system to make this happen. All I'm saying is that criminalizing insider trading is a very clumsy way for the government to regulate information asymmetry and tax the financial service industry.

I'm sorry that your view of what's right and wrong and how to enact the best public policy relating to pharmaceutical development is not as nuanced and sophisticated as it could have been.

I have no clue how slavery pertains to insider trading. Mathew Martoma will probably get to explore sodomy, but again I don't grasp the connection, other than supporting the nonsense that insider trading is illegal now, but not unethical. Except it is. Ethical principle: don't rob or harm others. Insider trading both harms the system as a whole and steals money from those who played the game straight.

Today Joel Ross testified at the trial, a guy who very well might have more clinical research experience than all of us here put together. I'm sure he thought his view of what's right and wrong was equally nuanced and sophisticated as yours. And I'm sure he regrets it terribly.

 

[dl2dp2]

Let's start with the above statement. You are clearly not a trial investigator. There are two things you got wrong within a single sentence. 1. Trial investigators are blinded. They don't know the results until the study is either: found to be futile/harmful and thus pulled, or done and all the results in, cleared, summed. 2. Even many among the least sophisticated and nuanced doctors know that trial results are publicized many months prior to publication. Publication comes many months later.

You are somehow obsessed with my word choices. Trial investigators are blinded DURING THE TRIAL, but not after the trial is completed and data analyzed. Are you telling me that the trial investigators NEVER know the results of the trial. Clearly, this can't possibly be true or there will be no inside information to release to the involved parties. Secondly, what I meant by "publication", is formal announcement, i.e. publication of the trial results in THE PRESS to the PUBLIC, not strictly publication of a paper in an academic journal.

Yes. It is unethical and illegal. In this case they are the same. Again, to everyone else reading: insider trading is stealing money from everyone who doesn't have that information to make educated picks. If you consider the actual function of the US financial system in relation to biotech it is this: to fund innovation. This system works by taking risks on things like Elan's monoclonal antibody, Bapi, as a disease modifying treatment for AD. The payoff could have been huge. This system does not work if hedge funds get insider information about trial results prior to the formal announcements. Because who then would actually take an honest risk?

Not everyone is betting on biotech companies in any kind of direct way. As I said above, the only parties that are "hurt" in a direct way, or, in a legal sense can claim actionable tort, are the investors who bet against the company, as well as the pharmaceutical companies whose shares of stocks become unstable because of information asymmetry. There is something to "steal" in part because the system is set up in a way that allows the "stealing" to occur. Sure, the insider traders did not play by the rules, but the system itself is not blameless. The legal arguments for and against criminalizing insider trading is much more complex than you portray it to be, and furthermore you did not really provide any tractable policy alternative--whereas I did. The most important question is how do we PREVENT insider trading from happening in the period prior to the release of clinical trial result. And some of the suggestions have been put forth (and mind you, not by me...)--i.e. immediate release of data, auction of expert consensus opinion, etc. While I sympathize with your indignation, it in itself does get a bit boring.

If you want to discuss this from a private finance, rather than than public policy perspective, the harm of insider trading has to do with the very low cost of information that gets disseminated when one of the trial investigators who know the result "whispers" the thumbs up or down to a hedge fund. The information should have a very high cost. It's not at all true that if inside information is available nobody would take a risk--because inside information is ALWAYS available, just not to any kind of definitive extent until the trial is over. Investors bet based on the available information gathered from a variety of sources. It is very naive to think that there is a Chinese wall between what is "inside" and what is "outside". Not even current case law clearly delineates this, and certainly it is not always clear utilizing what kind of information under what kind of circumstance constitutes criminal conduct. Even basic issues in who has legal standing to sue are complex. This is why there are law firms specialize in this kind of work and why Milton Friedman thinks that we shoul have MORE, not LESS, insider trading. I am not saying that insider trading IS legal or ethical. I'm just saying that there MAYBE an argument to be made that they should not be illegal or unethical (and certainly, criminal) at all times--and in fact they aren't, even right now--and in this case, we will see... Finally, the reason I draw the parallel between insider trade and sodomy law is that they are both situations where there is a legal argument to be made (by people much smarter than me) that they are "victimless crimes".

 

[neglect]

You are somehow obsessed with my word choices. Trial investigators are blinded DURING THE TRIAL, but not after the trial is completed and data analyzed. Are you telling me that the trial investigators NEVER know the results of the trial. Clearly, this can't possibly be true or there will be no inside information to release to the involved parties. Secondly, what I meant by "publication", is formal announcement, i.e. publication of the trial results in THE PRESS to the PUBLIC, not strictly publication of a paper in an academic journal.

It is hard to discuss this because: 1. You use words improperly. 2. You don't know anything, but for some reason persist in wallowing in your uninformed and unethical opinion. It is becoming delusional.

Words matter. Words have meaning. Without shared meaning we cannot communicate. Publication of scientific papers has a very different meaning than announcements to the press. Regardless, even by the time the NY Times or the WSJ goes to press the stock has moved.

Trial investigators are blinded until well after the data has cleared and been analyzed. Sometimes this process takes many months. Again, in your ignorance you seem to believe that blinded trial investigators have no inside information. If you'd been paying attention, then you would have discovered that AE's (sorry, you probably don't know that this stands for Adverse Event/Experience) ARE known by the investigators. And Joel Ross told Martoma exactly this information. The Elan conference among investigators was a very atypical event, in which investigators were invited to a meeting to go over the data at the AD conference. This is exceedingly rare, but didn't matter much anyway, because Martoma had already gotten the information from Gilman, who was on the DSMB.

Not everyone is betting on biotech companies in any kind of direct way. As I said above, the only parties that are "hurt" in a direct way, or, in a legal sense can claim actionable tort, are the investors who bet against the company, as well as the pharmaceutical companies whose shares of stocks become unstable because of information asymmetry. There is something to "steal" in part because the system is set up in a way that allows the "stealing" to occur. Sure, the insider traders did not play by the rules, but the system itself is not blameless. The legal arguments for and against criminalizing insider trading is much more complex than you portray it to be, and furthermore you did not really provide any tractable policy alternative--whereas I did. The most important question is how do we PREVENT insider trading from happening in the period prior to the release of clinical trial result. And some of the suggestions have been put forth (and mind you, not by me...)--i.e. immediate release of data, auction of expert consensus opinion, etc. While I sympathize with your indignation, it in itself does get a bit boring.

If you want to discuss this from a private finance, rather than than public policy perspective, the harm of insider trading has to do with the very low cost of information that gets disseminated when one of the trial investigators who know the result "whispers" the thumbs up or down to a hedge fund. The information should have a very high cost. It's not at all true that if inside information is available nobody would take a risk--because inside information is ALWAYS available, just not to any kind of definitive extent until the trial is over. Investors bet based on the available information gathered from a variety of sources. It is very naive to think that there is a Chinese wall between what is "inside" and what is "outside". Not even current case law clearly delineates this, and certainly it is not always clear utilizing what kind of information under what kind of circumstance constitutes criminal conduct. Even basic issues in who has legal standing to sue are complex. This is why there are law firms specialize in this kind of work and why Milton Friedman thinks that we shoul have MORE, not LESS, insider trading. I am not saying that insider trading IS legal or ethical. I'm just saying that there MAYBE an argument to be made that they should not be illegal or unethical (and certainly, criminal) at all times--and in fact they aren't, even right now--and in this case, we will see... Finally, the reason I draw the parallel between insider trade and sodomy law is that they are both situations where there is a legal argument to be made (by people much smarter than me) that they are "victimless crimes".

We agree that there are many people who are much smarter than you. So far, with all those words, you have not touched upon this:

Ethical principle: don't rob or harm others. Insider trading both harms the system as a whole and steals money from those who played the game straight.

Also, just because the losses are distributed among many many people does not make this a victimless crime.

 

[dl2dp2]

Again, in your ignorance you seem to believe that blinded trial investigators have no inside information. If you'd been paying attention, then you would have discovered that AE's (sorry, you probably don't know that this stands for Adverse Event/Experience) ARE known by the investigators. And Joel Ross told Martoma exactly this information. The Elan conference among investigators was a very atypical event, in which investigators were invited to a meeting to go over the data at the AD conference. This is exceedingly rare, but didn't matter much anyway, because Martoma had already gotten the information from Gilman, who was on the DSMB.

Interestingly you seem to very gun-ho on proving my "ignorance". We can try to pull CVs out and see who's more ignorant about clinical trials, but this seems to be hilariously missing the point. You have a knack for personal attacks but it does get boring quickly. It does make me wonder why you are so angry, and obviously you know that emotion, like imprecise usage which perhaps I'm guilty of, can impair communication.

If you read my post carefully, I actually said exactly that trial investigators HAVE insider information. However, your point is a perfect example of my latter point: what is "inside" and what is "outside" is not entirely clear, and depends on timing and nature of the information. Trial investigators during and after the trial before and after the publication have all kinds of information that's available or not available to a variety of parties. Release of some of this information to certain parties is considered insider trading. But the nature and extent of responsibility, criminality, and actionable damage are complex.

Ethical principle: don't rob or harm others. Insider trading both harms the system as a whole and steals money from those who played the game straight.

Also, just because the losses are distributed among many many people does not make this a victimless crime.

This point is not nearly as straightforward as you think. Just to take that sentence apart. As I said before, what is insider trading especially in pharmaceutical development is not WELL DEFINED either by case law or by ethical guidelines. And therefore it is a mistake to say that it is "as a whole" anything. Your second point is legally invalid. There is a specific definition in criminal law on who is a victim of a crime and who has the standing to sue for damage. Insider trading, very specifically, does not meet this conventional criteria. Case closed. The legal argument for criminality for insider trading relies on the "misappropriation" principle, that the one who has the information has the fiduciary duty to the institution that obtained the information to keep it confidential because of the possible damage--in this case, the victim IS well defined (i.e. the institution that holds this information). In United States v. O'Hagan, 521 U.S. 642, 655 (1997), O'Hagan's lawyers argued that O'Hagan, who's lawyering for a firm issuing Pilsbury a bond, does not have the fiduciary duty to Pillsbury, the argument was rejected by SCOTUS because it was thought that the degree of connection between the O'Hagan and the Pilsbury, a firm that he's not directly servicing, met the standards of misappropriation. That decision is also important in that it ascertains a firm's information as its property. I.e. the insider trader specifically steals from the firm. In our case at hand, who (i.e. a trial investigator vis-a-vis the hedge fund) is associated with a clinical trial holding sufficient connection and having enough fiduciary duty to qualify for insider trading is UNDEFINED by prior case law. Another way to say this is that if these issues are really clear cut it would have never gone to trial, and would've been settled out of court. Again, as you can see, if US vs. O'Hagan is to be quoted, the firm should be able to auction the information to a few "privileged" bidders because the firm has the property rights the to the information. But the current SEC regulation does not allow that, and there's an argument to be made that this policy is an incorrect one. This is also where intellectual property law intersects, because OWNERSHIP to information is poorly defined in clinical trials.

Not that I know much about these case laws as a (shocking...) clinical trialist, but I know enough to know what I don't know and I interact enough with the legal department to know better. All this information is standard coverage in internal meetings. Also, FYI, appropriate timing and the degree of release of information pertaining to clinical trials generally involve multiple panels, and while sometimes things are clear cut, other times institutions take a RISK for potentially triggering regulatory flags due to other business-side reasons. I'm not entirely privy to the facts of the case, and can't really make an appropriate judgement, but your narrative of a "naive" "elder" yielding to "temptations" of the "evil" hedge fund is a tad simplistic. Sid Gilman is prolly smarter than both of us, and if it's really clear cut that he's throwing away his career for a such a ridiculously small amount he would never have done it. And I bet you he had consulted lawyers prior to this. The world is a big place. Modesty is a virtue.

 

[danielmd06]

Hey sluox. Very strong responses. What is your background? You are welcome to PM if you wish.

 

[typhoonegator]

Deep breath, everyone. It's like watching a prize fight up in here. Lots of talking points on either side, and everyone is doing a good job of staying largely objective, but things are a bit heated. Please try to stay measured in your responses. For what it's worth, both sides of the argument have been very interesting to read.

 

[neglect]

Interestingly you seem to very gun-ho on proving my "ignorance".

Your position leaves some question about ignorance. Alternatively it rests on stupidity, but that's been outlawed as a theory. There's always sociopathy or a general inability to understand social norms, ethical standards, or honor. So I took the most charitable option.

I've never seen talking cure a delusion and by now I don't expect it will help you. So I'd like to mostly address this to others and point out the many false points.

However, your point is a perfect example of my latter point: what is "inside" and what is "outside" is not entirely clear, and depends on timing and nature of the information.

False:

"Prosecutors on Thursday questioned former Elan scientist Enchi Liu, who testified that Dr. Gilman was bound by strict confidentiality requirements as chairman of the Alzheimer's drug trial's safety-monitoring committee and that the information he was privy to in his role was secret until Elan and Wyeth publicized it."

This is entirely clear. Inside is clear. Timing is clear. Nature of information is clear.

Trial investigators during and after the trial before and after the publication have all kinds of information that's available or not available to a variety of parties. Release of some of this information to certain parties is considered insider trading. But the nature and extent of responsibility, criminality, and actionable damage are complex.

Not really. "Dr. Ross was a principal investigator in a clinical trial of an Alzheimer’s drug for two drug companies, Elan and Wyeth, and had signed several confidentiality agreements pledging not to disclose any details about his clinical trial." Do not disclose details about the trial pretty much sums it up. And while a blinded clinical investigator doesn't usually have that much data to share, a member of the DSMB is at a whole different level of responsibility and secrecy.

This is also where intellectual property law intersects, because OWNERSHIP to information is poorly defined in clinical trials.

Totally wrong. "Dr. Gilman testified about his job on the safety committee, saying that “all the material we saw was to be kept confidential.” But he said he violated that when it came to passing information on to Mr. Martoma." The material belonged to Elan, they wanted it to be kept confidential. This is a very important misreading on your part. You also sign away any rights you have to publish the data you collect. Why? Because you don't own the information.

Gilman knows this to be all too true. "“I revealed information that was confidential about a clinical drug trial to Mathew Martoma inappropriately."

Not that I know much about these case laws as a (shocking...) clinical trialist,

Nor even as much as a jury of your peers.

your narrative of a "naive" "elder" yielding to "temptations" of the "evil" hedge fund is a tad simplistic. Sid Gilman is prolly smarter than both of us, and if it's really clear cut that he's throwing away his career for a such a ridiculously small amount he would never have done it. And I bet you he had consulted lawyers prior to this. The world is a big place. Modesty is a virtue.

Wrong again. Is it somehow a necessary condition of your writing that it is factually incorrect? 120,000 dollars is not a small amount by any stretch, although, admittedly, it is dwarfed by Martoma's 10 million dollar bonus that year.

"A somewhat frail-looking Gilman was having some issues hearing the questions asked by lead prosecutor, Arlo Devlin-Brown. When asked to identify Martoma, Gilman took a few moments to scan the courtroom before saying he needed his "distant glasses." He was then able to identify the defendant."

Also, "At times Dr. Gilman asked for questions to be repeated, saying he couldn’t hear them and noting that he wears hearing aids... At moments, Dr. Gilman, who spoke with a firm voice and spoke with authority about medical terminology and disease of the brain, also showed signs of a faulty memory."

Also, "lawyers are expected to question the memory of Dr. Gilman, which prosecutors conceded is "far from perfect.""

 

[dl2dp2]

Hey sluox. Very strong responses. What is your background? You are welcome to PM if you wish.

I'm just a humble clinical trialist working in the academe on CNS drugs development.

Also, "At times Dr. Gilman asked for questions to be repeated, saying he couldn’t hear them and noting that he wears hearing aids... At moments, Dr. Gilman, who spoke with a firm voice and spoke with authority about medical terminology and disease of the brain, also showed signs of a faulty memory."

Also, "lawyers are expected to question the memory of Dr. Gilman, which prosecutors conceded is "far from perfect.""

This is kind of interesting... But yeah, I was talking more in general terms, and really don't know much about the case-specific details. Maybe you are right, maybe it is very clear cut in this case, but the whole case just seems weird. I mean, 10 million is a lot of money, but it's really not that much by hedge fund standards. In the Sam Waskal case, he was doing more like 20-30 million, and that was a while ago, so considering the inflation factor... Dunno...who knows what these people are thinking these days...

The ongoing narrative is that Sid Gilman went senile and disclosed clearly confidential info as a DSMB member for 120k. Doesn't this seem like a weird story? Maybe if that's the case then SAC capital would be held responsible for somehow defrauding Gilman into disclosing this when he didn't know better....

Hedge fund behaviors are just distorted by large sums of money invested by institutional investors. Because so much money is at stake, they can afford to take these regulatory risks. Which is makes preventative rather than punitive strategies that much more important.

 

[danielmd06]

I'm just a humble clinical trialist working in the academe on CNS drugs development.

Gotcha. From the way you answered the questions, I was curious if you had a law background.

 

[neglect]

I'm just a humble clinical trialist working in the academe on CNS drugs development.

Then given your beliefs, you'd best watch your behavior and run everything you do through legal first, not second. Regardless of the verdict on Martoma (but really, how could it be anything other than guilty?), Gilman's legacy is over. And Ross likely has an uphill battle to convince drug companies to partner with him. Or not. Perhaps they don't care.

This is kind of interesting... But yeah, I was talking more in general terms, and really don't know much about the case-specific details. Maybe you are right, maybe it is very clear cut in this case, but the whole case just seems weird. I mean, 10 million is a lot of money, but it's really not that much by hedge fund standards. In the Sam Waskal case, he was doing more like 20-30 million, and that was a while ago, so considering the inflation factor... Dunno...who knows what these people are thinking these days...

The ongoing narrative is that Sid Gilman went senile and disclosed clearly confidential info as a DSMB member for 120k. Doesn't this seem like a weird story? Maybe if that's the case then SAC capital would be held responsible for somehow defrauding Gilman into disclosing this when he didn't know better....

Hedge fund behaviors are just distorted by large sums of money invested by institutional investors. Because so much money is at stake, they can afford to take these regulatory risks. Which is makes preventative rather than punitive strategies that much more important.

At this point the evidence is pretty damning. First of all, a much weaker case was brought against a guy from SAC named Steinberg, but he was found guilty nonetheless about one month ago. At this point we now know Martoma lied about his law school transcript, got kicked out, then changed his name and very possibly lied again to get into Stanford business school. He entered Wall Street and within a few years "earned" millions. Here's a view of his possible mindset. It's also a view of the corrosive atmosphere in finance.

Thus far the trial has featured a compliance officer at SAC (do you think he shows up wearing window dressing on Halloween?) saying that Martoma had attended his classes. Ross said that Martoma had information that should have been confidential just after an investigator meeting and got case reports of AE's out of him. Enchi Liu said Gilman was sworn to confidentiality. Gilman said he "slipped up," and inappropriately told Martoma about the trial. At that point, I don't believe any crime occurred. It occurred when Martoma spoke to Cohen and acted on the information.

The Sam Waskal case is very different from this and is not part of a hedge fund "standard" - see the link for more on that. Dr. Waskal actually did something, very much unlike those who move bits of money around. From my limited understanding, Waskal discovered, developed, and produced a novel cancer treatment. He made a major slip when he revealed confidential data to Martha Stewart, among others.

What's amazing to me, as I sit here making a neurologist's salary, is the greed on display. It wasn't enough for Martoma to take home 1 million that year. (And consider that number. I will not make that in 4 years, yet I will literally save people's lives, comfort the sick and dying, and will enable hundreds of people to maintain a better day to day quality of life, free of seizures, migraines, stiffness, relapses.) He had to make more. He had to push into illegal trading. But of course, only a person with very hazy honor and moral clarity would change their law school transcripts.

How common are Martoma's honor and moral clarity on WallStreet?

 

[neglect]

I just took a close look at a confidentiality agreement a pharm company sent me, which I normally sign without a second thought. This agreement states company has proprietary ownership. One can disclose the information, but only with written permission of the sponsor.

The language is easy to understand, the expectations are clear, and it is a total of one page.

 

[dl2dp2]

Enchi Liu said Gilman was sworn to confidentiality. Gilman said he "slipped up," and inappropriately told Martoma about the trial. At that point, I don't believe any crime occurred. It occurred when Martoma spoke to Cohen and acted on the information.

There is a lot of legal gray space here. Gilman's slip-up, even if not criminal, might still be an actionable tort from whoever sponsored the trial. SAC is known to act on gray-space information in the past, and are in multiple lawsuits on this. The problem is that these kinds of law suits are so costly because the underlying instruments are worth SO much. While you might think the evidence is clear cut, it's not clear from a legal perspective. While you think that it's very clear who's greedy, who's right and who's wrong, the legal examination is really complex, and involves specific contractual language and evidence that SAC acted in a specific way that can establish cause and effect between the information and the sell-out. The presentation and substance of the evidence are based on strict rules established (or in this case, not established) by prior case law.

I totally understand your outrage. Why is it that a clinician like you and I, who save real lives, are getting paid 250k a year (if that), when Martoma is seemingly unhappy with 1 million, and Cohen is apparently unhappy with 1 BILLION. The reason is that from an economic perspective, individual lives have a certain monetary value, and there are financial implications of that value. Individual lives are not worth an infinite amount, or else we wouldn't be driving to work every day because the risk of being killed multiples by the infinity would be an expected value of negative infinity. There are only so many lives you can save in a set amount of time, and each of such act is valued by the market. Financial transactions are done based on commission. People in financial services make money because of the economy of scale and the scarcity of people who are able to conduct these transactions, primarily because of their social capital. I'm not saying that it's "fair" or "ethical", but it's the way the market is set up at the moment. In fact, I'm suggesting ways to reform the market that would make it fairer. I agree with you comparing you and I vs. Cohen and Martoma, we have different moral standards. But we also have different moral standards compared to a lot of other people. Doesn't mean that what they do should necessarily be illegal (i.e. exactly why I brought up sodomy law). You think greed is a bad thing. Some people don't agree. You think the best way to prevent greed is to criminalize it. I disagree. I think the best way to prevent greed is to tax it.

Rest assured, the actual utility of 250k vs. 1 million vs. 1 billion isn't that much different, especially if you don't live in Manhattan. There are only so many beds you'll need and so many children you can have. In many ways, the drive to acquire money isn't as something as egregious as "greed", but perhaps something as uncontrollable and unconscious as an addiction. Cohen will never be able to spend his net worth in his lifetime. So why is he trying to accumulate more and more?

http://www.nytimes.com/2014/01/19/opinion/sunday/for-the-love-of-money.html

 

[dl2dp2]

Oh and this very easy to read Mergers and Inquisitions article...

http://www.mergersandinquisitions.com/investment-bankers-make-money/

Doctors are employees, not salesmen. We are an "expense", so to speak. You have to learn to live with that very fact. Or perhaps you want to become a doctor turned policy maker (Rand Paul or Howard Dean?) and make the market for financial services more efficient through clever regulations.

 

[danielmd06]

The reason is that from an economic perspective, individual lives have a certain monetary value, and there are financial implications of that value. Individual lives are not worth an infinite amount, or else we wouldn't be driving to work every day because the risk of being killed multiples by the infinity would be an expected value of negative infinity. There are only so many lives you can save in a set amount of time, and each of such act is valued by the market.

Curiously, the value for our services as set by insurance companies and Medicare does not seem very congruent with the cost of our supposed mistakes when malpractice suits materialize. An office checkup may be valued at around $100, but a mistake during that visit may cost you over seven figures...

 

[neglect]

There is a lot of legal gray space here. Gilman's slip-up, even if not criminal, might still be an actionable tort from whoever sponsored the trial. SAC is known to act on gray-space information in the past, and are in multiple lawsuits on this. The problem is that these kinds of law suits are so costly because the underlying instruments are worth SO much. While you might think the evidence is clear cut, it's not clear from a legal perspective. While you think that it's very clear who's greedy, who's right and who's wrong, the legal examination is really complex, and involves specific contractual language and evidence that SAC acted in a specific way that can establish cause and effect between the information and the sell-out. The presentation and substance of the evidence are based on strict rules established (or in this case, not established) by prior case law.

I do think this one is pretty clear cut. The jury will begin deliberations next week. It would have to be filled with insane *****s not to convict.

My outrage hinges less on the wealth disparity than the fact that someone cheated the system. I really take offense to that. Martoma was given every opportunity in life, but chose to: fake his transcript, lie to Stanford, get involved in ANOTHER criminal business (his partner went to jail), and then go to SAC where he was incapable of playing it straight. Again, I see the financial system as supporting human endeavors that make a difference: from building bridges to building cures. What Martoma did was to undermine that.

Don' get me wrong. Wealth discrepancies are shameful. It is insane that Martoma was paid the salary of 100 pediatricians in a single year.

But you don't have to lecture me on what a human life is actually worth. Anyone with eyes could see that some lives I prolong really aren't worth anything at all. But you seem not to realize the way I get paid is set by Medicare. I don't get to negotiate: I'll give you tPA for a better shot of a better outcome, but only for 1/10th of your net worth. Greed is not necessarily a bad thing - it works in the public interest many times, as Ayn Rand pointed out. But unabashed greed? Greed to make you corrupt? Martoma level greed?

http://www.nytimes.com/2014/01/19/opinion/sunday/for-the-love-of-money.html

Yes, I also linked to that article above:

Here's a view of his possible mindset. It's also a view of the corrosive atmosphere in finance.

 

[dl2dp2]

My outrage hinges less on the wealth disparity than the fact that someone cheated the system. I really take offense to that. Martoma was given every opportunity in life, but chose to: fake his transcript, lie to Stanford, get involved in ANOTHER criminal business (his partner went to jail), and then go to SAC where he was incapable of playing it straight.

Sure, maybe Martoma is a criminal and deserve to go to jail (and that's left for the jury to decide). But this doesn't solve the fundamental problem that assymetric information can be worth a LOT of money. You can be outraged that someone cheated the system. But how useful is that outrage? I'm actually suggesting ways we can fix the system and potentially advocate for them. I'm just bothered by anger when (1) when anger is directed to one thing, but not something else that's equivalent due to cultural/economic, etc. other reasons. (2) when said angry person isn't doing anything--or even thinking about HOW to do something--to make the thing that makes you angry better. I just like to think in terms of big pictures.

 

[neglect]

I'm presently torn because I believe Martoma to be guilty but I wasn't on the jury. I also believe the us jury system has excellent sensitivity and specificity. Odd ball cases like oj Simpson will always happen, but we have to trust the system. I do take issue with some issues in this case, much was allowed to discredit Martomas accusers and suppressed to protect him. Jury selection is also suspect. But let's await the verdict.

 

[neglect]

Sure, maybe Martoma is a criminal and deserve to go to jail (and that's left for the jury to decide). But this doesn't solve the fundamental problem that assymetric information can be worth a LOT of money. You can be outraged that someone cheated the system. But how useful is that outrage? I'm actually suggesting ways we can fix the system and potentially advocate for them. I'm just bothered by anger when (1) when anger is directed to one thing, but not something else that's equivalent due to cultural/economic, etc. other reasons. (2) when said angry person isn't doing anything--or even thinking about HOW to do something--to make the thing that makes you angry better. I just like to think in terms of big pictures.

I do not understand this post whatsoever. First off, I'm outraged when someone cheats the system and instead of being a man about it and fessing up, lawyers up and does everything he can to escape the consequences of his crime. Why is this even cast in terms of being useful or not? Second off, I don't understand how there is a "fundamental problem" that needs to be fixed. There is no problem. Insider information can be worth a lot of money adn like other assets, is regulated. Thirdly, I have no clue what (1) or (2) is all about. Nor do I see you thinking in terms of the big picture - not that you seem so hot on details either. The big picture is this: a guy cheated and made a lot of money, he got caught, and now he is going to jail.

And he is going to jail. He was found guilty.

 

[typhoonegator]

Neglect, thanks for covering the case.

 

[danielmd06]

And he is going to jail. He was found guilty.

Thank goodness. Agree with TN, thanks for update.

 

[neglect]

I was going to post something in response to sloux to help him understand how important proprietary information is, but I forgot. Here it is.

Imagine you've got a great idea to treat you disease of interest. And it becomes a trial, to which you and your team devote your lives. In the pilot trial, the results look promising enough to move forward in your opinion, but many investors might not agree. So obviously you want to reassure them and put these numbers in context.

So who owns this information? You do. And no one can take it from you. No one can release it into the world. And that's also when releasing information would help a competitor. Or allow a huge pharm giant from stealing the idea.

From this perspective, you see information as something to be protected. Which is what the law did.

 

[neglect]

Today Martoma received a sentence of 9 years in jail and will forfeit his bonus of 9 million and change from that year. See above for what I think, but I believe justice was done, although I'd like the money to be with interest. One can steal money without interest apparently.

 

[neglect]

This week Martoma, not Cohen, reported to prison.

The New Yorker covered the events in an incredible, captivating story.

My thoughts: I've been following this story because it had to do with AD. But I kept at it because it contains so much humanity and more corruption than you'll find on a season of Boardwalk Empire (OK, not true, but more than an episode). Now that it is over, Stephen Cohen remains free and is going to remain free, despite being implicated in insider trading. He was never tried. There must have been a reason for this, and I suspect it was due to Martoma not flipping. Regardless of Martoma's reasoning (or his rationalizations), this is a damn shame.

Cohen and Martoma brought two doctors into the morass. There is a direct lesson for all of us. Some of us are on the cutting edge of medicine. We do this to offer our patients better options, to advance medicine and allow future patients MUCH better options, and for the financial benefits it brings. These financial benefits take a back seat for the most part. I find there are very few clinical investigators who are in it for the money. We care about patients, medicine, way more than augment salaries. This situation is reversed in financial circles. It is an utterly different and foreign culture. Most are ethical, but so many are not that the New Yorker asks "Is dishonesty endemic in finance?" Bottom line: when you are dealing with these people, you are dealing with a foreign culture very distal to patients, medicine, science, advancements, but very proximal to money. Perhaps as a correlate, they also think you're an idiot because they make ten times your salary (and they think this has perfect fidelity).

I was surprised to find that someone believed that inside information need not be protected from these people. Their arguments are above. Well, if you didn't believe me, please believe the consequences.

I think we will never know why Martoma did not flip. Some toxic combination of pride, tribalism or ingroup/outgroup, his wife (does he hate her and want to part ways with her?), other pressures? This is also a shame. I believe that cooperating with the federal prosecutors from the first is the best way for a criminal to not only redeem themselves in the eyes of society, but also to heal themselves from the inside. Now Martoma has a 9 year sentence to think about the paths not followed.

 

[neglect]

I wanted to bump this thread after prison released Martoma. He reported to prison in late 2014, served more than 5 years on a 9 year sentence. He paid his debt to society and I wish him well, or as well as possible given his character. We all have lines that we don't cross. Martoma's lines were not apparent. His greed, combined with some toxic combination, allowed him to put himself in a terrible situation that resulted in his loss of liberty and likely screwed up his life.

He serves as a very important example: accept no malfeasance in your life. Don't be a Martoma. Don't make money a god. Do good work and let the money follow. Many of you likely aren't aware of this at all, but the lesson is ever-green.

Steve Cohen now owns the Mets, and I wish them all the bad luck in the world. He never paid the price he owes. Karma isn't real, but I wish it were.