Are You at Risk for Insider Trading Liability?
Many people at the University have access to confidential information
of potential commercial value. That puts them at risk for insider trading
While "insider trading" may conjure up images of Wall Street
rogues delivering suitcases of cash in dark alleys, in fact many instances
of insider trading prosecuted by the SEC involve much lower stakes and
in many cases people who do not even work in securities firms or corporations.
Two recent cases involve faculty at institutions much like Penn. The purpose
of this note is to warn the Penn community of the risks of insider training.
What is insider trading? It involves purchasing or selling a security
from or to a party other than the issuer, using "material, non-public
information for personal financial gain." That means using significant
information that has not yet been disclosed to the public to make extra
money for yourself, your family or your friends. For example, a researcher
who has advance knowledge about the efficacy of a drug and purchases the
stock of the sponsoring pharmaceutical firm prior to a public announcement
about the drug's effectiveness may violate rules against insider trading.
That is exactly the fact pattern behind recent charges brought by the
SEC against an Associate Professor of Neurology at Columbia University.
The neurologist helped to evaluate Myotrophin, a new drug developed to
treat Lou Gehrig's disease. He traded the stock of Cephalon Inc. based
upon knowledge that he gained while conducting confidential clinical trials
for the company in 1995. In their lawsuit, the SEC charged that the neurologist
had made more than $26,000 in illegal profits by purchasing Cephalon stock
just a few weeks before he knew the company was to announce positive findings
about the drug.
Passing confidential information on to friends or family so that they
may profit, sometimes called "tipping," also violates insider
trading rules. The SEC has filed charges against a Professor of Medicinal
Chemistry and Pharmacology at the University of Minnesota who served as
a scientific advisor to Cephalon and allegedly passed secret information
on to his sons, who then purchased stock. In that case, the SEC has also
filed charges against both of the professor's sons despite the fact that
they claim to have made no profits from their securities trades.
Many scientists, engineers and physicians at Penn are involved in research
studies that are of commercial as well as scientific importance.
Individuals potentially at risk for insider trading liability include
those who have access to research results before they are made public and
who also own or purchase securities in companies that develop the research
results. This includes a wide range of personnel, from the head of the
research project to the scientist who runs the laboratory to the administrative
assistant who types the research report. It is critical that all personnel
with direct or indirect access to confidential information understand the
rules about insider trading.
A recent article in the New England Journal of Medicine (Vol.
337, No. 9, pp. 631-634) discusses biomedical research and insider trading.
In the concluding paragraph, the author states, "Four points emerge
from this discussion of biomedical research and insider trading. First,
in certain circumstances, the results of biomedical research can constitute
a form of insider information and trigger the application of the federal
securities laws. Second, a corporate employee who trades on the basis of
such knowledge risks civil or criminal liability under the federal securities
law. Third, a corporate outsider who trades on such information risks liability
under both the securities laws and the mail-fraud statute if, by trading
on the information, the person breaches a fiduciary duty to his or her
employer or another party. Finally, as a general rule, to avoid liability,
a person entrusted with research data under conditions of confidentiality
should refrain from trading on the information before it has been made
The article provides a good summary of the statutory framework governing
insider trading. If you think you may be at risk for insider trading liability,
we recommend that you read the article carefully and consult your attorney.
Any questions about the University's policy should be addressed to the
General Counsel's office.
-- Ralph Amado, Vice Provost for Research
-- Richard Tannen, Vice Dean, School of Medicine
-- Shelley Green, General Counsel
-- Kathy Engebretson, Vice President for Finance