NEWARK, N.J. — On April 14, 2011, James Fan stood on a parking garage landing at Newark Liberty International Airport, a cheer-you-up letter from his young son in his pants pocket, the prospect of a four-story leap facing him.
Fan, 39, had been charged a day earlier with insider trading based on his knowledge of Seattle Genetics Inc., a health-care company where he was manager of clinical programming. Also charged: his younger brother, Zishen, who was scheduled to take the oath of U.S. citizenship a month later.
The total take, a judge later determined, was about $200,000. James Fan was trying to help his brother, who had found himself deep under water after the California real estate market collapsed in 2008, prosecutors said later.
“The Fan case is such a cautionary tale,” Jenny Durkan, the U.S. attorney in Seattle, said in an interview. “Both brothers were promising.”
The markets are awash in insider trading, and the health-care industry has been particularly hard-hit. Health-care businesses offer illegal traders more opportunities to profit than the finance and technology sectors that have traditionally been prime victims of insiders who leaked confidential data about earnings or deals.
Health companies can live or die on the results of drug trials, which stretch for years before regulators make decisions that can trigger hundreds of millions of dollars in profits or losses. And the industry has undergone significant consolidation, leading to several multibillion-dollar mergers.
The lineup of accused health-industry insider traders illustrates how widespread the illegal practice has become: chief executive officers, hedge fund traders, bankers, lawyers, doctors, accountants, a retired Delta Air Lines pilot, a film producer and a member of Major League Baseball’s Hall of Fame have been charged or sued by regulators. It has touched the Food and Drug Administration and large health-care companies such as Bristol-Myers Squibb and Abbott Laboratories.
“Health care is particularly attractive to criminals because so much turns on the government regulatory approval,” said Rod Rosenstein, the U.S. attorney for Maryland, whose office helped prosecute the FDA case. “If you have a pending application for a new drug, the difference between yes and no on approvals can be tens or hundreds of millions of dollars.”
The Fans are among at least 75 people sued by the SEC or charged since 2008 with passing or receiving insider-trading tips involving pharmaceutical, biotechnology or other health-care stocks. While the number of insider-trading cases in the technology industry has been roughly the same during that time, many of those were intertwined with the case of Raj Rajaratnam, the billionaire hedge-fund manager serving an 11-year prison sentence.
What’s notable about health-care corruption is its breadth. It’s a part of what could be termed the democratization of insider trading. While once it seemed to be the domain of big players like arbitrager Ivan Boesky and personified by the character Gordon Gekko in the movie “Wall Street,” insider trading now is often conducted by everyday, otherwise law-abiding people looking to make thousands, not millions, of dollars.
Among the cases: husbands stealing information from wives, fraternity brothers conspiring and a 62-year-old attorney, Dean Goetz, making trades on information he overheard from his daughter. She was a lawyer visiting home for the holidays while she worked on the Abbott acquisition of Advanced Medical Optics Inc. Goetz, who was sued by the SEC, settled without admitting or denying wrongdoing.
“The biotech industry is particularly vulnerable to insider trading schemes because a successful or unsuccessful clinical trial can cause such sharp market movements,” Durkan, the top federal prosecutor in Seattle, said in an interview.
And there is also this:
“The health-care sector of the hedge fund industry is a very small world where people work closely on ideas.”
That’s what one health-care inside trader turned confidential informant told the FBI in an agent’s interview summary obtained by Bloomberg News.
The same informant, in another interview, said he was once on a golf course with three doctors whose beepers all went off at the same moment with the same inside tip.
Among the cases:
• An FDA chemist, Cheng Yi Liang, had access to the agency’s internal tracking system for new drug applications, and could tell which would succeed or fail. He pleaded guilty to trading on more than 25 companies over almost five years, admitting he made profit or avoided losses of $3.78 million. He is serving five years in prison.
• Eddie Murray, the Hall of Famer, was sued by the Securities and Exchange Commission, which alleged his former Baltimore Orioles teammate, Doug DeCinces, tipped him about the acquisition of Advanced Medical Optics in 2009. The agency said DeCinces heard from former CEO James V. Mazzo, a close friend and neighbor, that Abbott Park, Ill.-based Abbott would buy the company. Murray, DeCinces and two other men paid $3.3 million to settle without admitting liability. Mazzo and another defendant denied any wrongdoing. Their case is pending.
• Business consultant Brett Cohen and his uncle, David Myers, were charged with insider trading in 2009 on two biotechnology companies. Cohen received and sent emails, including some to a fraternity brother, using coded words that referred to the movie “Wall Street,” such as “blue horseshoe.” Cohen and Myers pleaded guilty and received three years’ probation.
• Former hedge fund manager Stephen Goldfield settled an SEC lawsuit claiming he made $14 million by trading on inside information before the 2007 takeover of MedImmune Inc. by AstraZeneca. The SEC claimed a former Merck & Co. executive, James Self Jr., tipped Goldfield after learning on his job that MedImmune was for sale. Self also settled. Neither man admitted wrongdoing.
• Robert Ramnarine was a Bristol-Myers executive who performed due diligence on three companies targeted for acquisition. U.S. prosecutors in New Jersey charged him with making $311,361 by buying stock options in the companies. His lawyer is negotiating a plea agreement, court papers show.
The Fan story illustrates how health-care insiders abuse privileged information for profit, while the aftermath of investigations can destroy people and careers. It also shows how regulators and prosecutors — and, in this case, an online brokerage — acted on red flags.
Cashing in a lifeline
James Fan (born Zizhong Fan) and his wife trained as physicians in China, where the pay was low, said James Fan’s attorney in Los Angeles, Adam Braun, a former federal prosecutor. He never practiced medicine and moved to the U.S. in 1999, a year after his brother.
“When he came to the U.S., he wasn’t able to practice medicine, so he went into medical research,” Braun said.
James Fan worked for several years at MedImmune in Maryland. He moved to Seattle to improve the respiratory health of his two young sons, who both have severe asthma, Braun said.
In July 2008, James Fan began work at Seattle Genetics in Bothell, Wash., as a senior statistical programmer. His job was to convert raw data from clinical trials into statistics measuring testing on drugs.
By 2010, he made about $110,000 a year and led a group of programmers who analyzed the data from a pair of clinical trials on the company’s flagship drug, SGN-35. The results would underpin the company’s FDA application for its first marketed product. Seattle Genetics developed the drug with Takeda Pharmaceutical Co. of Osaka, Japan. Seattle Genetics would handle marketing in the U.S. and Canada while Takeda had the other worldwide rights.
The drug, also known as brentuximab vedotin, uses an antibody to bind with a protein on the surface of lymphoma cells, then blasts them with a cancer-killing chemical. It avoids the side effects of chemotherapy by unleashing the cell-killing agent only when it reaches the tumor, avoiding release in the bloodstream or to healthy tissue.
In 2010, the company ran one clinical trial involving 102 patients for whom prior therapy didn’t work and another with 58 patients. The trials would be a success, the company said, if 20 percent of patients showed complete or partial remission of their disease. James Fan learned in July 2010 that the raw data showed progress for a large majority of the patients.
Because of the trials, Seattle Genetics began a blackout period on employees trading company securities starting June 22. A day earlier, James Fan cashed $50,800 in certificates of deposit and put it in his personal bank account, according to an FBI complaint. On June 30, he wired $50,000 from his online brokerage account to his bank account.
Nine days later, James Fan wired $100,000 to an account in China in the name of his mother, according to the FBI complaint. Fan moved that money to an online TD Ameritrade Holding Corp. account in the name of his father in China. James Fan intended that money as a loan for Zishen, who also moved money into the account, according to Braun.
On Aug. 24, Zishen Fan began buying options to purchase shares of Seattle Genetics at $12.50 per share by Oct. 16. Those options purchases, in the account in his father’s name, continued until Sept. 24, when he added 12,650 shares. Over a month, the brothers spent $514,314 on stock and options purchases of Seattle Genetics.
On Monday, Sept. 27, Seattle Genetics announced that SGN-35 cut tumor size by at least half for 75 percent of the 102-patient group. Shares closed at $14.30, a rise of almost 18 percent. Zishen Fan began exercising the options and selling shares.
The activity aroused suspicions at Omaha, Neb.-based TD Ameritrade, which filed a complaint about possible insider trading on Oct. 27 with the SEC and the Financial Crimes Enforcement Network, a U.S. Treasury Department bureau that fights money laundering.
“TD Ameritrade utilizes a variety of risk-management tools and surveillance methodologies to identify potentially problematic activity,” Kristin Petrick, a company spokeswoman, said in an email. “We do so to help protect our clients and comply with relevant laws and regulations. It is our policy to not comment on the specifics of these methods.”
The Options Regulatory Surveillance Authority, or ORSA, which monitors trading for the Chicago Board Options Exchange and other exchanges, also flagged the account and alerted the SEC on Dec. 13.
ORSA found that on 11 days, Fan’s buys ranged from 40 to 92 percent of all such contracts.
SEC lawyers in San Francisco, who also cover Seattle, took up the case. They called the Fan brothers within minutes of each other on Jan. 13, 2011. SEC attorney Jennifer Lee told Zishen Fan that she was taping the call.
“How did you become familiar with Seattle Genetics?” Lee asked.
“Web search,” Fan said. “I’m interested in, you know, medical biotech pharmaceuticals.”
“OK,” Lee said. “And do you know anyone who has worked at Seattle Genetics?”
“No,” Fan said.
Minutes later, James Fan interrupted his own call with the SEC lawyers and said he would call right back. Over the next two hours, the brothers talked four times by phone. When James Fan spoke again to the SEC, he denied knowing or being related to Zishen Fan. He refused to give the names of his parents. When asked about SGN-35, he ended the call.
Later that day, Zishen transferred $50,000 from his father’s brokerage account to a bank account in his father’s name. The next day, Zishen tried to wire $500,000 from the brokerage account to an account in China, telling TD Ameritrade it was for “purchasing retirement property.” TD Ameritrade refused the request “due to a lack of signed authorization for purposes of foreign transfers,” according to the FBI complaint.
On Jan. 19, the SEC sued, filing a complaint that laid out the insider trading scheme. The agency said they made profits of $803,000 and sought to freeze the Fans’ assets. The agency cited the Fans’ lies to the SEC and attempts to move money to China. It included hundreds of pages of documents, such as trading records from TD Ameritrade.
A federal judge in Seattle froze the account that day.
The case again them
As a legal permanent resident with a green card, James Fan was concerned a criminal investigation and conviction would lead to his deportation, Braun said. Fan said he feared separation from his two young sons, both U.S. citizens, the lawyer said. They were ages 3 and 7 at the time.
Braun said he and Zishen Fan’s lawyer Allen Ressler met on Feb. 16 with a federal prosecutor, an FBI agent and an SEC attorney to try to persuade them to punish the Fans through the regulatory lawsuit and not by criminal prosecution. The defense lawyers offered explanations for the evidence.
“We laid out some facts that would tend to suggest the case was not as clean as they thought,” Braun said.
Braun said that in their phone calls, the brothers may have discussed what was already in the public domain about Seattle Genetics, suggesting they didn’t act on inside information. Zishen Fan could have made educated purchases based on the mix of information in the public. He also had previously traded in pharmaceutical stocks, Braun said. The lies to the SEC attorneys at the start of the probe were problematic, Braun conceded.
“They were nervous and they lied,” Braun said. “We obviously had to try to explain that away. They were in a precarious immigration situation and they were scared. We took the position that James didn’t know that his brother was trading.”
On April 13, prosecutors filed a criminal complaint in federal court in Seattle. The Fans’ charges constituted the first criminal insider-trading case for federal prosecutors in western Washington.
The next morning, FBI agents went to arrest Fan at his rental home in Mill Creek, Wash. They didn’t know Fan was working in New Jersey.
Fan’s distraught wife called Braun, who phoned a prosecutor about 7 a.m. to complain. Braun said agents should have let Fan surrender rather than arrest him. Braun promised to bring his client to court the next day for his initial appearance and bail hearing. Braun spoke with Fan at his job.
“He was scared,” Braun said.
Braun talked to Fan several times that day, discussing trial strategy, the hiring of experts and the court hearing. Fan told Braun he would reserve a flight out of Newark. Fan went to the airport without making a flight reservation for that day.
He spoke that afternoon with a high school friend from China who lived in New Jersey. The friend grew alarmed and went to the airport to find Fan, Braun said. The friend then contacted police from the Port Authority of New York and New Jersey, which runs the airport, and said Fan was suicidal and at a parking garage.
When police arrived, they found Fan’s body beside the garage. They determined he jumped from a fourth-floor landing, said Port Authority spokesman Al Della Fave. They also found his rental car in the garage. He was pronounced dead at a local hospital.
“Until the very last minute, he was probably deciding whether to fly,” Braun said. “In the end, he had a letter from one of his boys in his pocket and a picture of his wife. They had sent him a letter when he was in New Jersey to kind of perk him up.”
Durkan, the U.S. attorney in Seattle, said the government acted correctly in filing charges and seeking to arrest Fan rather than let him surrender.
“There is always uncertainty in litigation, but this was a very strong case,” Durkan said. “We have no doubt the jury would have reached the right conclusion.”