U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21987 / June 2, 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 ADDITIONAL INSIDER TRADING
On June 2, 2011, the Securities and Exchange Commission filed an amended complaint in the U.S. District Court for the District of Maryland (Greenbelt Division) in its insider trading action against Cheng Yi Liang, a chemist who worked at the U.S. Food and Drug Administration (FDA). The SEC’s amended complaint charges Liang with trading in advance of a 28th drug approval announcement and through an additional brokerage account in the name of a sixth nominee.
On March 29, 2011, the SEC filed a complaint in federal court in Maryland alleging that Liang illegally traded in advance of at least 27 public announcements about FDA drug approval decisions involving 19 publicly traded companies, garnering more than $3.6 million in illicit profits and avoided losses. Today’s amended complaint alleges that Liang traded in advance of a 28th announcement involving a 20th publicly-traded company, XenoPort, Inc.
As alleged in the amended complaint, Liang accessed a confidential FDA database that contained critical documents and information about the FDA’s review of Horizant, a drug developed by XenoPort to treat restless leg syndrome. Between January 6 and March 24, 2011, Liang accessed the confidential FDA database at least 52 times to monitor the status of the FDA’s review of Horizant. Then between February 22 and March 24, 2011, Liang purchased 43,000 shares of XenoPort in accounts in the name of three nominees: Hui Juan Chen, Zhongshan Chen, and Andrew Liang. On March 29, 2011, Liang was charged by the SEC and arrested by the criminal authorities in a parallel criminal investigation. One week later, on April 6, 2011, XenoPort announced that the FDA had approved Horizant, which caused XenoPort’s shares to rise 56% and resulted in imputed profits to Liang of over $126,000.
The amended complaint, in addition, alleges that Liang used an eighth brokerage account in the name of his 87-year-old father, Zhaozheng Liang, to trade beginning in January 2011 and in advance of the XenoPort and Clinical Data, Inc. announcements. The amended complaint also names Zhaozheng Liang as a relief defendant.
The SEC’s amended 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 amended complaint names Liang’s wife Yi Zhuge and the account holders for the eight trading accounts Liang used – Liang’s mother Hui Juan Chen, his son Andrew Liang, his father Zhaozheng 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.
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.