Litigation Release No. 19738 / June 23, 2006

SEC v. Alexander J. Yaroshinsky, Civil Action No. 06CV2401 (S.D.N.Y., filed March 28, 2006)

SEC Charges Massachusetts Man with Illegally Trading on Inside Tip from Drug Executive

Commission adds defendant to insider trading case against executive who traded on FDA comments about carcinogenicity tests of acne drug

The Securities and Exchange Commission announced the filing yesterday of an Amended Complaint in SEC v. Yaroshinsky, a case pending in the United States District Court for the Southern District of New York. The Amended Complaint adds Victor E. Zak as a defendant in the Commission's previously filed insider trading case against California drug executive Alexander J. Yaroshinsky. The Amended Complaint alleges that Zak, a resident of Newton, Massachusetts, received material non-public information from Yaroshinsky concerning the FDA staff's preliminary analysis of the carcinogenicity tests of Velac Gel, an acne drug being developed by Yaroshinsky's then employer, California-based Connetics Corporation. The Amended Complaint alleges that both Zak and Yaroshinsky traded on the basis of this information. In the end, Zak profited from his illegal trading by more than $900,000 and together, Yaroshinsky and Zak benefited financially by more than $1.58 million.

The Amended Complaint alleges that on April 13, 2005, at 2:15 p.m. Yaroshinsky and other representatives of Connetics participated on a telephone call with FDA staff, during which the FDA staff told Connetics that the FDA's Executive Carcinogenicity Assessment Committee had concluded that the Velac Gel vehicle may be a "tumor promoter or a carcinogen" and that "this is a serious issue for a topical product for the treatment of acne… ." Shortly after the call, Yaroshinsky called Zak, his friend and former neighbor, and told him what he had learned earlier that day from the FDA staff. Minutes later, Zak, who, prior to April 13 had maintained a 5,000 share long position in Connetics, began executing transactions that positioned him to benefit from a drop in Connetics' share price.

The Amended Complaint further alleges that between April 13 and June 10, Yaroshinsky and Zak executed numerous trades. Yaroshinsky purchased put contracts in his own account and in a nominee account opened in the name of his mother-in-law and sold shares of Connetics common stock in his own account. Zak purchased put contracts, sold short Connetics shares, and sold his long position of Connetics shares. All of the trading by defendants was conducted in advance of a June 13, 2005 public announcement by Connetics stating that it had received a "not approvable" letter from the Food and Drug Administration ("FDA") concerning Velac Gel. After the announcement, Connetics' stock price fell 27%. Specifically, the Amended Complaint alleges that Yaroshinsky and Zak violated Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Among other relief, the Amended Complaint seeks a permanent injunction, disgorgement of all illegal profits, prejudgment interest and the imposition of civil monetary penalties.

The Commission expresses its appreciation to the Chicago Board Options Exchange for its assistance in the investigation of this matter.

For further information, see Litigation Release Nos. 19625 (March 28, 2006) and 19636 (April 3, 2006).

SEC Amended Complaint in this matter