FDA Tipster at Heart of Securities Indictment

     MANHATTAN (CN) — Federal prosecutors announced inside-trading charges Wednesday against hedge fund managers they received tips about generic drug applications from a former Food and Drug Administration official.
     The four newly unsealed filings come on the heels of a guilty plea Monday by the former FDA official Gordon Johnston.
     A 64-year-old resident of Olney, Maryland, Johnston gave tips on the drugs to Visium Asset Management manager Sanjay Valvani from 2005 to early 2011, according to the complaint.
     Prosecutors say Johnston provided “political intelligence” related to the timing of FDA generic drug applications.
     Johnston spent 12 years with the FDA, ultimately working as deputy director for the agency’s office of generic drugs, where he was responsible for policy development and implementation of new drug application approval processes, as well as establishing technical guidance for the pharmaceutical industry.
     The government says Johnston acquired inside information regarding generic drug approval from an unnamed source in the FDA. It is not clear whether that person still works at the agency.
     Valvani, who faces a newly unsealed indictment, spoke with Johnston via phone and email. Prosecutors say he paid Johnston consulting fees for the inside information.
     At various times Valvani allegedly told Johnston to take their communications “offline” to avoid scrutiny. The government says Valvani called the partnership off in 2011 because of inside-trading investigations.
     By then Valvani had earned roughly $32 million, according to the indictment. Johnston meanwhile received more than $100,000 in consulting fees.
     One of the generic drugs targeted in the scheme was enoxaparin, which Sanofi manufactured under the name brand Lovenox.
     Prosecutors say Valvani used the inside information on the generic drug application to buy credit default swaps on Sanofi, then profited when the company’s stock price fell after the generic was approved. Valvani cleared about $25 million when the generic version of enoxaparin was approved, according to the indictment.
     The scheme also involved mismarking the value of certain securities, thereby lying to investors to inflate the value of certain Visium funds by tens of millions of dollars and reap higher payments to the hedge fund.
     “Trading on confidential, non-public FDA information corrupts the carefully guarded drug approval process and simply will not be tolerated,” Elton Malone, special agent-in-charge of Health and Human Services, said in a statement.
     Johnston left the FDA in 1999 and joined the Generic Pharmaceutical Association four years later as its vice president of regulatory affairs.
     He worked at the association while conducting in insider trading but resigned in March 2011 to serve the association as a senior adviser.
     Johnston has worked as a pharmacist and spent years as a consultant with Lachman Consultant Services, providing regulatory and technical advice on FDA requirements and review procedures. He is currently listed as an expert consultant for NDA Partners, a consulting firm comprised of former government officials focused on regulatory advice and product placement.
     Though GPhA spokesman Steven Arnoff declined to comment on the lawsuit, he did say Johnston stopped working as a consultant for the association in 2015.
     “Gordon Johnston was vice president, regulatory sciences, from 2003-2011 then was retained as a consultant for four years thereafter, a term that has since expired,” Arnoff said in an email.
     NDA Partners has not returned a call seeking comment.
     Valvani, 44, of Brooklyn, is charged with two counts of securities fraud, one count of wire fraud, and two counts of conspiracy.
     The top charges could put him away for 20 years each, plus millions in fines.
     Johnston faces the similar punishment. He pleaded guilty Monday before U.S. Magistrate Judge James Francis IV to securities fraud, wire fraud and two counts of conspiracy.
     Valvani was scheduled for arraignment today along with a separately charged former Visium hedge fund manager charged separately.
     Prosecutors say 45-year-old Stefan Lumiere, of Manhattan, schemed with a former Visium portfolio manager Christopher Plaford to mismark securities in a fixed-income fund that Plaford managed. The scheme allegedly “inflated the net asset value of the fund and overstated the fund’s liquidity.”
     Plaford, 38, of Bedford, pleaded guilty last week before U.S. District Judge Ronnie Abrams to seven counts.
     Lumiere, 45, of Manhattan, is charged with one count of conspiracy, one count of securities fraud, and one count of wire fraud.
     The top charges against both men carry up to 20 years in prison plus millions in fines.

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