FDA chemist pleads guilty to scam involving pharmaceutical stocks

A Food and Drug Administration chemist pleaded guilty on Tuesday to using confidential government information about pending FDA drug approvals to make millions in profits by trading pharmaceutical company stocks.

Cheng Yi Liang of Gaithersburg, Md., admitted in federal court that he carried out a $3.7 million insider-trading scam from July 2006 to March 2011.

He used his access to the FDA’s password-protected computerized tracking system for new drug applications. By studying the progress – or failings – of a proposed new drug on the computer system, Mr. Liang was able to time his stock purchases or sales to benefit from the market effect of FDA public announcements.

Overall, he purchased and sold securities for 27 pharmaceutical companies – all with pending drug applications at the FDA, according to federal documents.

In announcing the guilty plea, Assistant Attorney General Lanny Breuer called the scam “a shocking abuse of trust.”

“Mr. Liang used inside information about pharmaceutical companies – information he had access to solely because of his position at the FDA – to pocket millions in illicit profits,” Mr. Bruer said in a statement.

As part of his plea agreement, Liang admitted to one count of securities fraud and one count of making false statements. He faces up to seven years in prison under federal sentencing guidelines, $5.25 million in fines, and restitution of $3.77 million.

Liang had been working as a chemist at the FDA’s Office of New Drug Quality Assessment since 1996.

To avoid detection, Liang set up a network of trading accounts in the names of family members and associates. In reality, Liang controlled the accounts. He purchased and sold the stocks through online trading accounts with TD Ameritrade and Scottrade.

Throughout the five-year scam, Liang did not list his trading income on government-required financial disclosure forms.

Authorities pieced the scheme together by installing software on Liang’s office computer that permitted investigators to take regular “screen shots” of data displayed on his computer screen. They discovered he was accessing confidential information about pending drug applications. Investigators linked the company information to stock transactions carried out in close proximity to FDA announcements.

Prosecutors highlighted Clinical Data Inc. as an example of Liang’s scam. The company had applied in 2010 for FDA approval of the drug Viibryd. After discovering the drug would win approval, Liang began buying Clinical Data stock. From Jan. 6 to Jan. 20, 2011, Liang purchased 46,875 shares of Clinical Data stock using the disguised accounts he controlled.

The FDA approval was announced Friday, Jan. 21, after the markets closed for the day. When the markets reopened on Monday, Clinical Data’s stock jumped from $15.03 a share to $24.76.

Liang sold all 46,875 shares of Clinical Data stock and netted a profit of $384,000, according to federal documents.

He pulled off a similar scam purchasing stock in Vanda Pharmaceuticals in 2009 while the company had a pending application at the FDA.

From March 30 to May 6, 2009, Liang bought 202,550 shares of Vanda stock at prices ranging from 82 cents per share to $1.14. When the company’s FDA approval was announced, the stock rose from $1.08 on May 6, 2009, to $9.96 the next day.

Liang sold 125,065 shares at prices ranging from $8 to $11.37. He made $1.02 million.

Other stocks targeted by Liang’s insider-trading include Progenics Pharmaceuticals for $466,351; MiddleBrook Pharmaceuticals for $269,710; and Momenta Pharmaceuticals for $131,200.

US District Judge Deborah Chasanow set sentencing for Jan. 9.