Litigation Release No. 20601 / May 27, 2008

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

Former Connetics Corp. Executive Settles Charges with SEC for Illegally Tipping and Trading on Inside Information

On May 23, 2008, the Honorable Colleen McMahon, U. S. District Judge for the Southern District of New York, entered a Final Judgment as to defendant Alexander Yaroshinsky in SEC v. Yaroshinsky, restraining and enjoining him from future violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. Yaroshinsky consented to the entry of the judgment without admitting or denying any of the allegations of the Commission's complaint. Yaroshinsky is liable for disgorgement in the amount of $354,927, plus prejudgment interest thereon in the amount of $84,275, and a civil penalty of $283,798.

The Second Amended Complaint in this matter alleges that Yaroshinsky, a former Vice President of Clinical Operations and Biostatistics for California-based Connetics Corporation, learned material non-public information concerning the FDA staff's preliminary analysis of the carcinogenicity tests of Velac Gel, an acne drug then being developed by Connetics. The Second Amended Complaint alleges that Yaroshinsky tipped his co-defendant Victor Zak to this information and then traded on it himself. In the end, Zak profited substantially from his illegal trading. Zak settled charges related to this case last year, and agreed to disgorge $863,830 in illicit profits, along with an injunction against future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The Commission waived payment of $216,358 of that figure based on Zak's sworn financial statements and other documents submitted to the Commission.

To settle the matter against him, Yaroshinsky is paying disgorgement of $138,569 for his own trades, plus an equal civil penalty of $138,569 and prejudgment interest of $32,902. He is also paying the $216,358 in disgorgement that Zak was unable to pay, plus prejudgment interest thereon of $51,373 and a civil penalty of $145,229.

The Second Amended Complaint alleges that on April 13, 2005, at 2:15 p.m. Yaroshinsky and other representatives of Connetics participated on a conference call in 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 just learned from the FDA staff. Minutes later, Zak, who had maintained a 5,000 share long position in Connetics before April 13, began executing transactions that positioned him to benefit from a drop in Connetics' share price.

The Second Amended Complaint further alleges that between April 13 and June 10, Yaroshinsky and Zak executed numerous trades. Yaroshinsky bought 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 bought 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 Second Amended Complaint alleges that Yaroshinsky and Yaroshinsky violated Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Among other relief, the Second 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 and to the Financial Industry Regulatory Authority for their assistance in the investigation of this matter.

For further information, see Litigation Release Nos. 19625 (March 28, 2006), 19636 (April 3, 2006), and 19738 (June 23, 2006).

SEC Second Amended Complaint in this matter