U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21907 / March 29, 2011
Securities and Exchange Commission v. Cheng Yi Liang, et al., Civil Action No. 8:11-cv-00819-RWT (D. Md.)
SEC CHARGES FDA CHEMIST WITH INSIDER TRADING AHEAD OF DRUG APPROVAL ANNOUNCEMENTS
The Securities and Exchange Commission today charged a U.S. Food and Drug Administration (FDA) chemist with insider trading on confidential information about upcoming announcements of FDA drug approval decisions, generating more than $3.6 million in illicit profits and avoided losses.
The SEC alleges that Cheng Yi Liang illegally traded in advance of at least 27 public announcements about FDA drug approval decisions involving 19 publicly traded companies. Some announcements concerned the FDA’s approval of new drugs while others concerned negative FDA decisions. In each instance, he traded in the same direction as the announcement. Liang went to great lengths to conceal his insider trading. He traded in seven brokerage accounts, none of which were in his name. One belonged to his 84-year-old mother who lives in China.
In a parallel action, criminal charges filed by the Department of Justice against Liang were unsealed today.
According to the SEC’s complaint filed in the U.S. District Court for the District of Maryland (Greenbelt Division), Liang works in the FDA’s Center for Drug Evaluation and Research. Beginning as early as July 2006, Liang purchased shares for a profit before 19 positive announcements regarding FDA decisions, shorted stock for a profit before six negative announcements, and sold shares to avoid losses before two negative announcements.
For example, the SEC alleges that Liang traded in advance of an FDA announcement approving Clinical Data’s application for the drug Viibryd. Liang accessed a confidential FDA database that contained critical documents and information about the FDA’s review of Clinical Data’s application, and then used that information to purchase more than 46,000 shares of Clinical Data at a cost of more than $700,000. After the markets closed on Friday, Jan. 21, 2011, the FDA issued a press release approving Viibryd. Clinical Data’s stock price rose by more than 67 percent the following Monday and Liang sold his entire Clinical Data position in less than 15 minutes for a profit of approximately $380,000.
The SEC alleges that Liang used the trading profits for his own personal benefit. Checks totaling at least $1.2 million were written from the accounts he used for trading to a bank account in his name, to Liang or his wife directly, or to credit card companies to pay off balances in accounts in his or his wife’s name. Nearly $65,000 worth of checks were written from the brokerage accounts to car dealerships to purchase vehicles later registered to Liang and his wife.
The SEC’s complaint alleges that Liang 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, and seeks a permanent injunction against future violations, disgorgement of unlawful trading profits and losses avoided plus prejudgment interest, and a financial penalty. The SEC’s complaint names Liang’s wife Yi Zhuge and the account holders for the seven trading accounts he used – Liang’s mother Hui Juan Chen, his son Andrew Liang, Shuhua Zhu, Zhongshan Chen, and Honami Toda – as relief defendants for the purpose of recovering ill-gotten funds to which they have no legitimate claim. Criminal charges by the Department of Justice against Andrew Liang were unsealed today in the District of Maryland.
The SEC thanks the Department of Justice’s Criminal Fraud Section, the Federal Bureau of Investigation, the Department of Health and Human Services Office of Inspector General, and the U.S. Attorney’s Office for the District of Maryland for their ongoing assistance in this matter. The SEC’s investigation is continuing.