Health Care Industry Can Guard Against SEC Insider Trading Push

The Securities and Exchange Commission continues its enforcement scrutiny on insider trading in the health care and life sciences industry, but companies can take actions to protect themselves.

This increased enforcement focus on insider trading in health care was illustrated by the filing of two recent cases in a single day: SEC v. Dupont and SEC v. Dagar.

In SEC v. Dupont, the agency charged Joseph Dupont, an Alexion insider, and four others, with insider trading before the announcement of Alexion’s offer to acquire Portola Pharmaceuticals Inc. Allegedly, after learning of the acquisition, Dupont shared this information with the other four defendants.

These initial tippees bought Portola shares and then quickly made over $2.3 million. Some defendants also allegedly tipped off others, including family members and friends, whose similar trades gained them more than $1.7 million.

The SEC charged a Pfizer insider in Dagar with insider trading for allegedly sharing material nonpublic information about the success of Pfizer’s Covid-19 treatment, Paxlovid.

Prior to the public release of trial results, the insider allegedly shared this information, which was communicated to several people, each of whom then purchased Pfizer stock based on the information. After the public announcement, Pfizer’s share price increased, generating $214,395 and $60,300 respectively in profits, for a one-day investment.

These cases not only follow several others involving health care company insiders, they came hard on the heels of other enforcement actions expanding the scope of insider trading liability. In one of those cases, SEC v. Panuwat, filed in 2021, the agency charged the defendant not with trading in the stock of his own company after learning of its incipient acquisition, but with trading options in the shares of another company whose share price he thought would be affected by this news.

This was the first “shadow trading” case, and it expanded the scope of insider trading law outside the traditional case of trading on your own company’s securities to trading in the securities of any company in the relevant field.

Panuwat came after two other settled administrative enforcement actions, both filed in 2020, in which the SEC brought charges based on corporate failures to enact and enforce internal policies “reasonably designed to prevent the misuse of material nonpublic information.”

In these cases, In re Ares Management and In re Andeavor LLC, the SEC arguably created enterprise liability for companies that failed to create or implement policies designed to prevent insider trading.

So, what can healthcare and life science companies do to comply with the evolving regulatory landscape, especially now that companies can potentially be prosecuted for violations by their personnel?

Recent case law teaches us that, in fact, much can be done to limit enterprise liability:

• Companies should develop, implement, and clearly communicate policies that explicitly prohibit communication of material nonpublic information.
• Specific written agreements should be executed by all personnel confirming receipt of these policies and guidelines. Moreover, there should be regular affirmations of the relevant legal standards, including periodic in-person communications about the illegality and risks of insider trading.
• Companies should conduct periodic audits of their policies and confirm that all personnel have periodically confirmed that they are aware of the prohibitions.
• Companies—both purchasers and issuers of the shares—should consider prohibitions on trading in any healthcare and life science companies, at least those which might be economically affected by actions taken by the purchaser, or the issuer of shares traded.

Risk can never be entirely eliminated—even a ban on all trading on material nonpublic information by employees might be violated—but certain steps seem reasonable to reduce the risk.

In an era of expansive growth in clinical research and corporate acquisition in an industry, it is critical that industry members—particularly biopharmaceutical companies—implement company policies that emphasize the importance of keeping material nonpublic information confidential, as well as preventing the purchase and sale of shares on that information.

The cases are SEC v. Dupont , S.D.N.Y., No. 23-320, 6/29/23; SEC v. Dagar, S.D.N.Y., No. 23-5564, 6/29/23.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Howard Fischer is a partner with the securities litigation practice at Moses Singer and former senior trial counsel at the SEC.

Kiyong Song is a law clerk with the firm’s healthcare & life sciences practice group.

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