The criminalization of securities enforcement has
increased in recent years. In many instances it is difficult if not impossible
to discern the dividing line between criminal and civil securities actions (here).
The virtual demise of the formal criminal reference process at the SEC in favor
of coordination with various law enforcement agencies through the President's
task force (here) and the Virginia task force (here) have contributed to this
trend and perhaps caused its acceleration.
In many instances this results in coordinated filings
such as when the SEC and the U.S. Attorney's Office jointly announced the first
option backdating cases (here). These trends continue with the filing of civil
and criminal insider trading charges against a French national, Dr. Yves
Benhamou. SEC v. Benhamou, Civil Action No. 10-CV-8266 (S.D.N.Y. Filed
Nov. 2, 2010) and U.S. v. Benhamou (S.D.N.Y. Filed Nov. 1, 2010).
The charges against Dr. Benhamou stem from two of his
professional positions. One is on the five member steering committee of
biopharmaceutical company Human Genome Sciences, Inc. ("HGSI") of Rockville,
Maryland. The other is as a consultant to the portfolio manager and investment
advisors to a group of hedge funds that buy and sell healthcare related
securities.
Dr. Benhamou, a medical doctor residing in France,
specializes in hepatitis and other diseases of the liver. He is the Chief of
Department, Clinical Research in Hepatology, Hopitaux de
Paris-Pitie-Salpetriere and an Associate Professor of Hepatology at the
Hopitaux de Paris-Salpetriere in Paris, France. He is also a clinical
investigative physician for HGSI and was involved the clinical trials for Albuferon,
a new drug to treat liver disease Hepatitis C.
The Phase 3 late-stage development clinical trial to test
safety and efficiency of the drug began in August 2007. Phase 2 testing had
been successful. Throughout the Phase 3 trial the company confirmed the
findings of Phase 2. It also publically stated that Albuferon could become the
"interferon of choice" for the treatment of hepatitis C. HGSI believed that the
drug had tremendous commercial potential.
From February 2007 through early December of that year
six hedge funds (collectively referred to in the complaint as "Healthcare
Funds), each of which had a separate investment adviser and had co-portfolio
managers (designated in the complaint as Nos. 1-6) employed at an investment
bank (in the complaint collectively referred to as "Healtcare Fund Advisors"),
purchased about 6.2 million shares of HGSI at an average price of $10.32 per
share. Dr. Benhamou was an advisor to the co-portfolio mangers of the
Healthcare Funds.
Beginning in November 2007 serious adverse events were
reported in connection with the Albuferon trials. Specifically, one patient in
the test died while another was hospitalized. Ultimately on January 23, 2008
HGSI issued a press release concerning the trials noting that at one dosage
level they were discontinued. Following the issuance of this press release the
share price dropped from $10.02 to $5.62.
Between the reporting of the first serious adverse event
and the issuance of the January 23 press release there were a series of internal
meetings and discussions assessing the available information about the drug
trials and whether they should proceed. Dr. Benhamou was kept apprised of the
evolving situation. As he was updated Dr. Benhamou kept Co-Portfolio Manager 1
informed, according to the complaint. For example, after the initial incident
report in November 2007, and before any decision was made on how to proceed,
Dr. Benhamou is alleged to have furnished the negative information to
Co-Portfolio Manager I. As a result the Healthcare Fund Advisors caused the
Healthcare Funds to sell a small portion of their holdings.
This pattern repeated over the time period leading up to
the public announcement that the trials at one dosage level would be
discontinued. By the time of that announcement the Healthcare Funds had sold
their position, avoiding at least a $30 million loss. Nevertheless, following
the public announcement Co-Portfolio Manager 1 told the other portfolio
managers he still wanted to own HGSI stock. Accordingly he made a buy recommendation
at $6 per share. The Healthcare Funds then purchase about 2.4 million shares.
The co-portfolio managers maintained that the stock was undervalued. They had a
target price of $17 per share through at least April 2008.
The SEC's complaint alleges violations of Securities Act
Section 17(a) and Exchange Act Section 10(b). The criminal complaint contains
one count of conspiracy to commit securities fraud and cone count of securities
fraud. Both cases are in litigation.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.