CANCER, A BIO-TECH COMPANY AND ALLEGED INSIDER TRAIDING

The Securities and Exchange Commission has a lot of territory to cover when it comes to uncovering insider trading frauds. The internationalization of securities trading has tempted many individuals to pass on insider information to friends and relatives living over seas. The hope of such fraudsters is to move their ill gotten profits along with themselves to a safe haven out side of the United States. In the following case the SEC alleges that a bio-tech manager arranged to have his relatives purchase stock options in the manager’s company after the manager became aware that there was a positive result for a cancer drug that his company was developing. The following excerpt came from the SEC website:

“Washington, D.C., Jan. 21, 2011 — The Securities and Exchange Commission today announced that it has obtained a court order freezing the bank and brokerage accounts controlled by an individual who made more than $800,000 in illegal profits by trading on inside information tipped to him by an employee of a Seattle-area biopharmaceutical firm.
In a complaint unsealed late Thursday by the U.S. District Court for the Western District of Washington, the SEC alleges that Zizhong (James) Fan, a manager at Seattle Genetics, told family member Zishen (Brandon) Fan about confidential positive trial results for the company's flagship cancer treatment. Zishen spent hundreds of thousands of dollars purchasing speculative stock options in the company as well as common stock, which skyrocketed in value when the news became public in late September 2010.

According to the SEC's complaint, the SEC staff contacted both Zizhong and Zishen last Thursday, January 13. Almost immediately after being contacted, Zishen attempted to wire several hundred thousand dollars to a bank in China while Zizhong informed his employer that he was leaving unexpectedly for China. The SEC thereafter filed an emergency enforcement action. On Wednesday, January 19, Judge Marsha J. Pechman of the Western District of Washington issued an order freezing brokerage and bank accounts containing the Seattle Genetics trading proceeds.

Marc Fagel, Director of the SEC's San Francisco Regional Office, explained, "While our investigation is at an early stage, when we have evidence of insider trading and the individuals involved respond to our investigation by trying to funnel their illicit profits offshore, we are prepared to take quick action to preserve those assets for recovery by the authorities."

The SEC's complaint alleges that Zizhong Fan, who lives in Bothell, Wash., was employed during 2010 as the manager of clinical programming at Seattle Genetics. He was involved in clinical trials for a development-stage product to be used in the treatment of Hodgkin's lymphoma. As Zizhong Fan began learning information about the success of those trials, Zishen Fan, who lives in Chino Hills, Calif., began amassing large quantities of risky stock options that would allow him to profit from a rise in the company's stock price.
The SEC's complaint alleges that on Sept. 24, 2010 — the day that Zizhong attended a series of meetings to finalize the results for presentation to the company's senior executives — Zishen made his largest options purchase to date (over 50 percent of the options trades in the entire market), while also buying $150,000 in stock. The next business day — September 27 — Seattle Genetics reported the positive results to the public, and its stock price rose nearly 18 percent. According to the SEC, Zishen ultimately realized net trading profits of more than $803,000.
The SEC's complaint charges Zizhong Fan and Zishen Fan with violating the antifraud provisions of the federal securities laws. The complaint seeks permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, and monetary penalties. The SEC also named another family member Junhua Fan, who resides in the People's Republic of China, as a relief defendant in the case. His brokerage account was used by Zishen to make many of the illegal trades, according to the SEC's complaint.
The SEC's investigation was conducted by Jennifer J. Lee and Jina L. Choi of the San Francisco Regional Office. The case will be litigated by Robert L. Mitchell. The SEC would like to thank the Chicago Board Options Exchange for its assistance in this matter. The SEC also acknowledges the cooperation of Seattle Genetics.”

Insider trading is done all the time however; there is some debate about what information should constitute an actionable crime and what information may be justifiably obtained. If a business executive knows some secret information that he and his family try to profit from at the publics expense then clearly that could be considered a crime. But, what about a case where the businesses executive passes on the same information but does not profit in any way from its distribution? What if a low level accountant casually passes on insider information to an acquaintance about a large purchase the government just made from his company? Even a shipping clerk or truck driver might be privy to insider information regarding large purchases. The line between obtaining insider information from company personnel and doing research by talking to company personnel should make any investor feel uncomfortable.