U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 18832 / August 13, 2004
SEC v. DERRICK S. MCKINLEY, (U.S.D.C. N.D. Ohio, Civil Action No. 1: 04 CV 1613, filed August 12, May 2004)
COMMISSION ALLEGES FORMER MEDICAL DIRECTOR OF GLIATECH, INC. PROFITED $1.6 MILLION FROM INSIDER TRADING IN GLIATECH, INC. STOCK
The Securities and Exchange Commission announced today that it filed a complaint against Derrick S. McKinley (McKinley), a former vice president and medical director of Gliatech, Inc. (Gliatech). Gliatech was a pharmaceutical company located in suburban Cleveland. The complaint alleges that McKinley sold Gliatech stock while in possession of material, non-public information concerning problems with Gliatech's primary product, Adcon-L Adhesion Barrier Gel (Adcon-L), a gel used to reduce scarring in patients following back surgery. During a twelve-month period from August 1999 to August 2000, McKinley sold short 221,000 shares of Gliatech stock in a series of transactions, reaping profits of approximately $1.6 million. From the outset of his trading, McKinley was aware of three major problems involving Adcon-L. By August 1999, McKinley (1) knew that a study of Adcon-L clinical trials (Adcon-L Study) submitted by Gliatech to the U.S. Food and Drug Administration (FDA) suffered from defects that undermined its reliability; (2) knew of sterility problems resulting from defective packaging by the overseas contractor Gliatech hired to manufacture Adcon-L; and (3) knew of complaints of cerebral spinal fluid leaks (CSF leaks) in patients following surgeries in which Adcon-L had been used. In October 1999, the FDA issued an import ban that prevented shipments of Adcon-L from entering the U.S. The ban resulted from unresolved FDA concerns that included the defective packaging and sterility problems. In March 2000, news of complaints about the CSF leaks became public. In August 2000, news of an FDA investigation challenging the integrity and results of the Adcon-L Study became public. When each of these three adverse developments became publicly known, the price of Gliatech stock dropped. McKinley profited from each of these three declines in the price of Gliatech stock. The complaint alleges that as a result of his conduct McKinley violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. The Commission is seeking an order that permanently enjoins McKinley from violating the antifraud provisions of the federal securities laws and that requires McKinley to disgorge his profits from his illegal trades and to pay a civil penalty.