French Doctor Charged in Criminal and Civil Insider Trading Cases

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.

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