An Overview of Insider Trading in the Clinical Trial Setting

Speaker 1: 0:00

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Speaker 2: 0:21

I am Alan Horwich . I'm here today with my co-author Krista Brawley about some articles that we published on the subject of insider trading in the clinical trial setting. Um, I've been with my law firm , uh, Aaron Fox Schiff , and its predecessor since 1969, and I'm currently an emeritus professor of practice at Northwestern Pritzker School of Law, where I've taught since 2000. Uh , my focus , uh, has been securities litigation over the years, and my scholarship focus has been on in insider trading. Uh, Christa would you , uh, give us , uh, where you come from?

Speaker 3: 0:56

Sure. Um, I'm an Associate Vice President for research at Northwestern University, as well as the institutional official of our human research protections program. So I primarily oversee compliance and regulatory units within a central office , uh, for research, which serves the entire university community and our affiliates. Um, prior to joining the executive team, I was vice president for research operations , um, at Rush University Medical Center here in Chicago. And I oversaw that entire , uh, research mission. So I have about 20 years of research experience , um, and a lot of research operations , um, experience, mostly with a focus on regulatory affairs. So we

Speaker 2: 1:31

Brought together my expertise , uh, if you will, on insider trading Krista's in the operation of clinical trials. And I wanna start out with our discussion to give some background on insider trading of the law so that , uh, those who don't have it will know the framework that we're gonna be talking about here. Uh , under SS e c Rule 10 be five. We have what the courts have developed under a type of federal common law, determining when it's unlawful to trade securities based on material non-public information. There are two theories here that apply the classical theory, or sometimes called the traditional theory where the rule is violated. When a corporate insider trades in the securities of his corporation on the basis of material, non-public information about the company or its securities, there's a relationship of trust and confidence between the shareholders of a corporation and those insiders who have obtained confidential information as a result of their position with that corporation. Uh , in most situations, insider trading involves open market transactions , and in that situation, 10 B five , that rule I refer to, imposes a duty upon the insider to make public disclosure before trading or not to trade, disclose, or abstain from trading. The duty extends not just to the senior people in the company like directors and the C e O , but really to anybody in the company for these purposes. Under the securities laws, it also reaches a temporary insider, like a consultant who might be brought in for a particular project. The second theory is called the misappropriation theory, and that's one where a person, whether or not she is an insider of the company and whose securities she trades violates the rule when she takes confidential information for securities trading purposes in breach of a duty owed to whoever is the source of the information. If the source and the recipient have a relationship of trust and confidence, such as under a confidentiality agreement, and we're gonna be talking about those as we move forward. 10 B five is violated by the undisclosed use of the principles or other sources, information the purchase or sell securities in breach of a duty of loyalty and confidentiality to the source. There's no requirement the trader first obtain permission from the source to trade, nor unlike the classical theory. Is there a requirement to make public disclosure? We're not gonna debate the wisdom of that theory. The Supreme Court has said that's the way it is . A person who cannot lawfully trade under either theory, who tells someone else material non-public information may be liable for tipping . In a lot of the cases in the clinical trial area , have involved tipping the recipient of the information who trades may be liable as ae . There are two key elements we're gonna talk about a little bit today specifically. One is , uh, whether information is public or not, the best way most people determine whether something is non-public is to see whether it is public. If it can't show it's public, then it's non-public. More importantly and more difficult for our situation that we're gonna be talking about is that a fact is material. If there's a substantial likelihood that a reasonable investor would consider important in making an investment decision, an omitted fact is material. If there's a substantial likelihood that the disclosure of the fact would've been viewed by the reasonable investor as having significantly altered the total mix of information made available. And if a situation involves something that's, that's in fluxx , which it surely is in the clinical trial setting, materiality will depend upon balancing the probability that the event will occur and the magnitude of the event, which is usually pretty big, particularly for a one, one drug company. So the probability issue , uh, comes to the fore. Uh , but I think in order to understand the thorny materiality issues that we're gonna be talking about, I think , uh, Krista should give us a background of the clinical trial process so we can see how information emerges and evolves over time so we can get into the specific issues that we've addressed in our, in our , uh, written materials.

Speaker 3: 5:53

Sounds good. So, for the drug approval process, when a pharmaceutical company has a potential new drug they wanna bring to market, there's a process that they need to follow in order to get the drug approved by the appropriate federal agencies, and in the United States, that's the Food and Drug Administration, or the F D A , and they wanna get that approval so that they can market and sell that drug. And our paper really focuses on step three of that process, which is the clinical research step of the process where the drug is tested on people to make sure that it's safe and effective. So researchers design , um, what we call clinical trials, which follow a specific study plan to ask questions and answer questions about how that drug interacts with the human body. And then clinical trials follow a series of studies , uh, which we call phases in order , uh, to get their drug approved. So trials begin at a very early phase. They either call the first in human or a phase zero, where there's a small number of participants and early milestone markers , um, that have to be met in order for , um, the, the drug to continue on in the phases. So if the early , early markers are met in that phase zero trial, the the drug can be moved into phase one clinical trials where you're really looking to determine the correct dose for that drug and develop some safety parameters around that drug. If all goes well in that phase one trial, the drug can be moved into phase two trials where the outcome is really about , um, efficacy or the ability of the drug to produce whatever desired result that is either, you know, cure or extended life, or whatever the desired result is. And they look at a little bit of the side effect profile in phase two trials. If the drug does really well in phase two, then they'll move it into a phase three trials, and that's where we have a large number of research participants, maybe hundreds to thousands that are enrolled to monitor for adverse reactions. And you con , um, continue to , um, assess the, the efficacy of that drug. Typically with good results in that phase three trial, the pharmaceutical company will seek the F D a approval through a new drug application and through a whole process that they will submit to the F D A if the F D A approves that drug. There's also phase four trials that are post-approval safety monitoring. So at any time throughout these phases is when information about the, the trial and how participants are doing on the drug can be revealed to a small group of individuals typically, that are making decisions about the progress of the drug through the clinical trial and through the f d a approval process. So this information throughout this process can be misappropriate used or disclosed to others, or, you know , um, which could evoke insider trading and this

Speaker 2: 8:22

At this, none of these phases are the results of these trials public

Speaker 3: 8:26

At this point? Correct? Correct. So usually , um, and there are also other nuances into trials where you have different , um, you have different , uh, structures , uh, especially in phase three trials, determining if participants are blinded, if the researchers are blinded. So you don't always know, you know, all the information. Um , but the gold standard in the field is to have a placebo controlled randomized clinical trial, you know, to know, you know, if this drug works and if they can go on and market it. So , um, so that's kinda the setup of how, you know , um, drugs are, drugs are tested and then the F D A goes on and approves , um, you know, those drugs

Speaker 2: 9:04

Or sometimes they'll not approve.

Speaker 3: 9:06

Correct. Exactly.

Speaker 2: 9:09

Um, just to give this a little more substance in a concrete case or a couple, we wanted to just mention to give the , uh, kinds of things that arise when the Securities exchange commission, or for that matter, the criminal prosecutors come out after people. One got a lot of play recently , um, nicely time-wise for our , uh, presentation here on the front page of the Wall Street Journal. One , a very prominent investor, a fellow named Joseph Lewis , um, was , uh, called to account , uh, suits have been filed, nothing determined there . And all I know is what's in the allegations in an SS e c complaint about several people, and an indictment against Lewis alone. Um , Lewis was a principal in investor in a lot of different investment vehicles that had investments in over 200 companies, including biotechs. And the senior officer of one of those funds made it a practice to inform Lewis of what was going on in some of these companies in which Lewis had invested directly or indirectly. And it's alleged by the S E C, that in one of those cases, an officer of the fund provided Lewis with positive non-public results from a clinical trial related to a cancer drug being developed by a particular company. Uh, this officer knew this because he sat on the board of this company. He had this non-public information, and , uh, Lewis is alleged to have tipped other people didn't trade himself far as we see the allegations, but he tipped to his then romantic interest. We understand that has changed since these events occurred, who purchased stock in this company, and that he tipped two of his pilots of his private planes who've worked for him for a couple of decades, I think. And he loaned them the money to go out and trade in the stock of this company. Uh, all three of them made money because when the clinical trials were, the results were released, they were favorable, and the stock went up. And collectively, these , uh, tippy, as we call them, made about $373,000. As I say, Lewis and the Tippy were sued by the SS e C. Um, and , uh, Lewis has been indicted for his involvement as , uh, tipping. Um, one interesting factor here is that according to Wall Street Journal, the bond , uh, that he had to post for his criminal case was the largest known to the Wall Street Journal anyway, of $300 million. Uh, because he's not a resident of the us , he resides in The Bahamas, and he has been prohibited from boarding his yacht. Um, some, some cases though involve the people who were actually involved in the trials themselves. Um, and , uh, we thought one more case that actually arose in, in the city where , uh, Kristen and I reside Chicago, that shows , uh, where it cuts to the heart of people involved in a clinical trial.

Speaker 3: 11:52

Right. So , um, all I think you're referring to , um, the Kasi case.

Speaker 2: 11:55

Yeah, I am .

Speaker 3: 11:57

Um, so , uh, Dr. Daniel Kasi , uh, he was a Chicago physician. He was a GI or a gastrointestinal medical oncologist at a prominent , uh, university here in Chicago. And he actually purchased shares of a biotech company , um, before a public announcement of a positive clinical trial data , uh, with, with approval of a gastric cancer drug came to light. So Dr. Ka Kasi was one of the lead clinical physicians and the primary investigator of the clinical trial in which he signed a confidentiality agreement to hold that role. Um, but he did have access to non-public material information about the trial and the drug, which he agreed to keep confidential. Unfortunately, he did buy these , um, shares in this company. When the public announcement went public, he sold those shares, and he , um, made a a profit of about $135,000 , um, after that public announcement came out. So , uh, he was facing federal prison <laugh> due to , um, you know, these charges. I believe he's since settled. Yeah,

Speaker 2: 12:55

He is . Worked out a deal with the government, which was not a , a , a heavy series of penalties, but, but pretty serious . And there are cases, we won't talk about more individual cases here, they're cited in our pieces, but , uh, where , uh, uh, principal investigators have been , uh, sent to prison for crossing the line in terms of using this information. I think one thing that I want to discuss , uh, Krista , and you and I have had a lot of discussions about this as we work through our analysis, is that, as we've already mentioned, there are confidentiality agreements in these contexts. You've talked about the one that Kaci had as a principal investigator. Uh, but what about , uh, trial participants , uh, when they come in to be interviewed for their initial intake, to see if they're a suitable subject for a trial or if they're taken into the trial? Do they have to ever have to sign confidentiality agreements?

Speaker 3: 13:46

They do not. Um, and I think some of the reason why they do not is because in the context of a clinical trial , um, participants are often told to discuss the trial and their health, and anything that happens in the trial with those close to them, those around them with their primary care physician to make sure that they're , they continue to , um, you know, attend to their health. And so they, there, there isn't this , um, confidentiality agreement or an agreement that speaks to keeping anything confidential. It's actually quite the opposite of where you're , they're encouraged to speak about it. Um, so the participants don't ever sign a confidentiality agreement. And it would be challenging in terms of timing of when to get a participant to sign a confidentiality agreement because you're trying to get them to enroll into your clinical trial. If you potentially presented a confidentiality agreement at the beginning, it might be a red flag of why would I need to sign this agreement to keep everything confident ? Like, is something negative gonna happen? Is something gonna happen if you presented it in the middle of the trial? I think that would also be a red flag. Um, kind of similar saying why all of a sudden now? And so we don't function under that. Um, you know, under that kind of an agreement,

Speaker 2: 14:58

I th I think we thought that, you know, if , if you, if when somebody comes in to , uh, uh, to , to respond to some sort of notice newspaper , uh, poster in their doctor's office or anything like that, that draws them their attention to a clinical trial and they come in , uh, if at the very beginning the , the , the, the person doing the intake says, well, before I tell you anything , uh, I want you to sign this confidentiality agreement. Uh, is that gonna impair the ability of the trial to , uh, enroll the number of , uh, participants that they need to, to have a , you know, a meaningful cohort cohort to do the , uh, uh, statistical analysis to demonstrate the , uh, safety and efficacy of the drug?

Speaker 3: 15:39

I mean, it very, it very well could, I mean, I think that , um, you know, it , it almost discourages somebody from participating, or at least raising the question of, why are they asking me to sign this, you know, in order to, to just, you know, potentially volunteer and participate in this research study. So I , it's just not a common practice and it's, it's kind of discouraged , um, in the clinical trial regulations. So

Speaker 2: 16:02

You're basically kind of at risk here that if one way or another, and we'll talk a little bit more about this, the participant gleans or infers some kind of material information. There's really no constraint under the law that I described earlier for them to make whatever use they want, right or wrong, or material or not of, of whatever they've , uh, learned or discerned.

Speaker 3: 16:28

Correct.

Speaker 2: 16:29

Um, couple of things that we came across were a few cases where , uh, people, particularly in the brokerage community had , um, uh, presented themselves as potential subjects for one of these trials where their purpose wasn't to enroll, but rather to try to pry out of the person doing the intake, any information that they could , uh, uh, obtain regarding the trial that they might be able to use to trade. Um, what would you tell the investigators or their staff who are doing this intake to , um, um, prevent or , or minimize the risk of somebody , uh, um, digging out some information that they would then use to trade?

Speaker 3: 17:12

There's, it is hard in that case, right, to , to say anything, to say , you know, you're, you're trying to put these participants on, but if they're trying to glean information , um, you know, or get too much information, you know, it , it's hard to decipher those, the , uh, those cases of when they're happening. But we know that they, they can happen and they do happen. Um, so it's, it's, you know, again, it's a lot of in , um, educating your, your staff to be sure that they're communicating, you know, with the potential participant appropriately, explaining what they can and using their gut to determine, you know, what's kind of happening in this, in this situation. But it's definitely, it could happen.

Speaker 2: 17:47

Is, is there, would there be information that would be material at that intake stage, or is it less likely or, or not likely at all that there would be,

Speaker 3: 17:56

I mean, it depends on the phase of the trial. If we're talking about a phase three trial, you definitely have the results of the phase one and the phase two. You gotta

Speaker 2: 18:02

Enroll several thousand new people, right?

Speaker 3: 18:04

And you do know, you will know , um, just based on some of that primary intake and some of the initial conversations as you're maybe discussing the consent or going down the consent process, the drug , um, the pharmaceutical company, you know, what you're looking to, to assess. And so there is definitely could be material, non-public information that is going, is going to be shared by

Speaker 2: 18:24

That point. Would you have some insight the investigators into what the side effects would be of the drug?

Speaker 3: 18:31

Depends on potentially, and it depends on how many participants maybe that investigator has put on or what has been published, where we're at in the trial. If we're gonna put thousands of patients on, let's say we're halfway through the trial, sometimes there's preliminary results that the investigator may already know. Sometimes it's just the information that, that he or she has in terms of what they've treated in their own, you know, in their own space or in their own clinic mm-hmm . <affirmative> . And they may have some insight , um, that they may share or may not share. And it may not be public at that point. Typically.

Speaker 2: 19:00

Um , I'm asking these of you, 'cause you're the expert on how these things play out in , in the scientific side of it, that , um, they, they have , uh, results of side effects both in phase one, and if it proceeds phase two, the company will have announced if , if it's a public company, they're doing testing of a particular drug, that they don't announce the results of these preliminary stage results,

Speaker 3: 19:25

Not typically.

Speaker 2: 19:26

And , and so this person who's trying to pry something out might be getting information if the person revealed it inadvertently or however , uh, that would not have been made public at this point. Correct. And then the , then the assessment becomes, is this material in terms of somebody who's interested in buying the stock of that particular trial sponsor, some of which are public, some of which are not, and we're not so much concerned here about the company that's , uh, that's non-public. I know when , when we were discussing early on in our work, you , you raised with me a situation where some information about a trial did leak out and had some impact on the trial itself. Uh, can you , uh, discuss what that situation was? Mm-hmm.

Speaker 3: 20:08

<affirmative> ? So , um, unfortunately , um, where, where we can see challenges is when , um, when individuals are chatting on social media or are joining , uh, chat rooms , um, around a certain disease or , um, it , it often happens in the pediatric space where it's family members that are chatting about their, you know, their children's , um, participation in clinical trials. And unfortunately , um, in some cases , um, whole cohorts can be unblinded and individuals can be unblinded to what they're receiving or not receiving. Um, so

Speaker 2: 20:39

They know what the drug is, so

Speaker 3: 20:40

They know what , whether

Speaker 2: 20:41

They're getting the drug or not.

Speaker 3: 20:42

Correct. Correct. And , um, that can very much skew results in a clinical trial. It could take a whole clinical trial off and make a maybe , um, delay a whole, a whole drug from coming to market. It could, you know, set back a whole clinical trial, set back a whole field , um, if this were to happen. Um,

Speaker 2: 20:58

So let , let's, let's, I wanna get better understanding of the facts here. So when somebody learns that, let's say their child, if we're talking about that kind of an example , um, has been told that , uh, he's, he's not gotten the drug or he has gotten the drug, and then there's some posting of on social media of, of that trial child's situation, how could that, from a, from a , uh, an f d a regulatory , uh, or just general good practice , uh, perspective damage the trial itself, irrespective from securities matters

Speaker 3: 21:30

Mm-hmm. <affirmative> . So if , um, if for, if for instance, that , uh, that child or it's determined that child hasn't received a drug and they just stop participating, or they just unenroll in that trial and try to go onto another one, you could end up with not enough participants and not enough statistical data to be able to know if that drug worked or push that drug to market.

Speaker 2: 21:47

So the , the ones who are not getting the drug would have the option, which I guess they always do at any time , right .

Speaker 3: 21:52

To

Speaker 2: 21:52

Leave the trial. Correct.

Speaker 3: 21:53

And

Speaker 2: 21:54

Then the trial doesn't have enough people , uh, taking the placebo to give you good comparison of the efficacy of , of the drug . So what can you do, what would you recommend institutions do to prevent or at least discourage , uh, people from doing this? It could harm the trial, even though it may have no effect on the person who decides, let's say, to leave the trial. Mm-hmm . <affirmative> .

Speaker 3: 22:17

So what I've seen , um, in certain cases is in the informed consent form, which is the, the form that is signed from the participant and the, the investigator , um, you know, kind of outlining the trial. I've seen clauses in there or pieces in there that ask the participants not to participate in these chat rooms or not to, you know , discuss , um, you know, some of the, the data or some of the things that are happening to them in those open kind of forums so that things like that don't happen. Um, but it's, you know ,

Speaker 2: 22:46

Is there any sanction that if they do it, Nope .

Speaker 3: 22:49

They have nothing to monitor for

Speaker 2: 22:50

The reason you stated, you don't want to kick them out of the trial. Correct.

Speaker 3: 22:53

'cause you

Speaker 2: 22:53

Need them there to provide the data for, for a , uh, uh, a sound , uh, statistical , uh, analysis. So, so we've talked about confidentiality agreements. We've said that doesn't really work with the participants that , uh, you admonish them, warn them against , uh, participating in chat rooms, which might reveal material, non-public information, some information that somebody, you know, might use to try , uh, to trade . Although at that point, maybe it's become public. And so there there's no , uh, no securities law concern there. But let's talk about when things become public. Um, what , what , what do , what do the scientists involve here? We're talking generally about people who work for often not non-profit research institutions. Mm-hmm . <affirmative> like , uh, universities , uh, like where you're at Northwestern, or, or the brush where you , where you worked before and so forth. Um, uh, that , uh, can , uh, uh, restrain people from doing these things. We can't get the , uh, the , uh, participant under wraps, but you try to get the , uh, the investigators and others not to trade. Um, how do we convey to them , um, what they can and can't do? They're not working for a public company. The people who work at the public company sponsor, presumably have been trained in this. They know the , the drill about insider trading and other disclosure policies at their company. But what do we do about , uh, somebody's , uh, you know, like Dr. Kaci we talked about earlier, who's on the , uh, staff of a , uh, of a not-for-profit , uh, medical school or, or hospital.

Speaker 3: 24:32

So universities, what we do, we often require , um, conflict of interest disclosures, which aren't, which are relationships arrangements . Um, and there's usually policies and procedures around conflict of interest. It can include family members, their personal financial interests and otherwise. And , um, what they ask you to disclose are relationships, financial or otherwise, and arrangements and perceived , um,

Speaker 2: 24:57

So whether they have skin in the gain Correct , in terms of the outcome of the trial, which might cause them to skew the results. Correct . Which I think has occurred over the years in very significant situations. But when , um, as I mentioned earlier, public companies have these training programs. I've done a lot of those over the years for public companies, whether it's for the senior management of a company or, or a broader group. Uh, does that occur in the , uh, not-for-profit , uh, scientific research space?

Speaker 3: 25:26

Not typically. So there's typically, or I haven't experienced , um, where there's been training and education around insider trading or specifically to , um, insider trading. Unfortunately, we usually rely on conflict of interest and those, those voluntary disclosures. But there isn't a formal , um, education process.

Speaker 2: 25:45

So , so there's no , um, statement of policy or rules and regulations that the institution may sign off on or regular training ?

Speaker 3: 25:55

No, not, not in terms of insider training.

Speaker 2: 25:57

Would it be practical to do that? Do you think that should be done?

Speaker 3: 26:00

I think it would be practical. I think knowing what I know now about the intricacies of this law and , um, how you could even be a , a a , a tipper and may not really realize what's happening or how these things, I think that there should be some guardrails that should be set up. At least some education , um, should just be told what to do. Because if I've learned anything , uh, through doing, through , through writing this with you and , and experiencing this with you, it's just, don't trade <laugh> <laugh> .

Speaker 2: 26:28

That's always the easy answer. Right . Don't, there's plenty of other stocks

Speaker 3: 26:31

Out there that's plenty

Speaker 2: 26:32

Of other stocks you can ,

Speaker 3: 26:33

Well , we don't even say that, you know, in, in the university space or in the research space. It's really just doesn't come up. And it's unfortunate because we hear about these cases after the fact, but had someone just said from the beginning, Hey, don't trade, don't do this, or, it's not a good idea to do this. I think you would reach a lot of people to say that.

Speaker 2: 26:50

And we've got a lot of horror stories. We've talked about a couple that that could be, that could be demonstrated, including, as I mentioned earlier, that people have , have gone to to jail. We , we've talked a lot about materiality here. This would be , pin this down. So as an ebb and flow occurs in the trial from phase one to two, when you have more people and you're looking more on efficacy, and then phase three on the overall , uh, uh, efficacy, safety, and so forth, side effects of the drug , um, I I , i , is there necessarily a complete up upward trajectory, it becomes more and more probable of success? Or does it, is it gonna jump up and down in terms of looking at a, at a line graph , for example? It

Speaker 3: 27:30

Depends. It really, it really does depend. Uh , I've seen, I've seen it many different ways, right? It really depends on , um, how, how well that trial is structured and you know, how good that that product is , um, and how good , um, investigators are at administering that product and following that protocol. So it really does depend. But the more people you put in these trials, you think in these phase three , there's a lot more people, there's a lot more data that comes out. So , um, I think that is probably pretty realistic. And

Speaker 2: 27:57

I , I , I know from just what I've read, just casually following this, is my interest is peaked in , in looking at this, is that, you know , some drugs can do very well through phase two , but then phase three doesn't do so well.

Speaker 3: 28:08

Correct.

Speaker 2: 28:09

And so you could have an upward trajectory through one and two, but then when you start getting this greater , uh, volume of data , um, things don't look so good. Uh , they , they don't think the drug could be successfully marketed or maybe not approved because it doesn't , uh, it's no better than the current standard of care. Correct.

Speaker 3: 28:26

Correct. Yeah. Or the side, the , um, you know, the side effect profile is too, too great and not tolerable. And

Speaker 2: 28:32

I, I would say that , uh, uh, for a layman to try , layman in the sense of a non securities lawyer, a doctor or other , uh, scientific professional to make the materiality judgment on a realtime basis would, would be , uh, uh, acting at , at his or her peril. Uh, and of course, all these cases, as many, much litigation is, is viewed . And in hindsight, if , if the drug does succeed, it's a blockbuster and somebody bought stock, then it's a lot easier for the s e C to argue that the information was material , um, at a given time. Uh , one thing we stewed about a little bit was when does information become public? We focused on materiality. And, and I know there are gatherings of doctors that may not be wide open to the public, or maybe they are, but at a fee . Um, when , when investigations are proceeding , uh, uh, medical professionals, whatever are putting up their posters at different conferences, when do you think the information becomes public so that it's no longer non-public?

Speaker 3: 29:32

Yeah, that's a hard one. I mean, conferences, some conferences , um, in those cases are not open to the public. And sometimes, or even presentations, but some are. And so if somebody, if a doctor presents something in a , in a large forum , um, you know, is that public? I mean, it's a room full of hundreds of people. Is that public? I don't know the answer, right? I think it's a hard one to know. Sometimes I do see , um, even in intimate settings, like in, in rounds, you know, which is common. It's just like my institution, just my doctors, you'll grand rounds at the

Speaker 2: 30:02

Hospital where they talk about what's going on at their institution, right?

Speaker 3: 30:05

And so you'll, you may have a presenter in that, and they may say, this information is not public yet. Please keep it confidential. And then, you know, you're expected too . Sometimes there's no, there's no disclosure though. There's nothing. So do you know if it's public, not public, I would assume I , I wouldn't assume anything. 'cause after doing this, I would assume anything <laugh> , I wouldn't assume, but you don't know . And if you don't tell, and you're not educated on people, what is this public, not public? What do investigators do on their phone sitting there hearing this information? I don't know. What's the prevent to prevent them from trading? I don't know .

Speaker 2: 30:35

One thing that, that , uh, we deal with a little bit is , um, let's say I'm in one of these trials and I'm, I'm doing really great and, and maybe I see some other people who are in the waiting room or in a support group that I'm in who are also in the trial and, and we're all getting better. Um, you know , is that gonna be material information that , uh, they , uh, might be a little bit , uh, should be reluctant to trade on? Or is that likely not material?

Speaker 3: 31:01

I don't know . It's hard to know, right? I mean, you don't know if the person's receiving the drug, not receiving the drug. Are they in the placebo group? Just, you know, but maybe they aren't. Maybe you're all receiving the therapy and everyone is getting better. So , um, it's hard to know , um, you know, if you're in a support group of a bunch of bunch of individuals, but if everyone is getting better and feeling better, hey, whether

Speaker 2: 31:21

They get the placebo or not, right? <laugh> , and , and, you know, I have to be candid here, there , I, I don't think I've ever discovered a case where a participant wa was sued, but you know, the , the SEC's always looking to push the envelope just to , uh, plow new ground. And on some of the theories that we spun out in our pieces , uh, other areas where they, where they might , uh, might push things. One example we talked about , uh, in , in our pieces, let's say a doctor who's so excited about how things are going , uh, tell , tells a particular patient that he's, he's managed to unblind the situation as to her, and she's really doing great. Everybody who's on the drug is doing great, but you know, he says, keep it under your hat . Now, is she pledged the confidentiality there? Well, that's a question. If she were to tell , uh, uh, her son or or her spouse , um, uh, this information , um, uh, she might actually be tipping if she's gotten material non-public information that she wasn't supposed to disclose. If she , uh, the s e c has a rule that says, if you have confidential information that you tell , uh, a very close family member , uh, that falls under that misappropriation theory that I described earlier , where you've breached a relationship of , uh, trust and confidence that maybe you have with this , uh, investigator. I should note , the investigator is generally not a treating physician. He doesn't have the typical medical confidentiality that, that we know of between doctor and patient. Uh, but if he pledges somebody to confidentiality and she sort of nods or something, you know, what are the facts in that situation? But that could very well , uh, uh, very well be a tip. Again, I'm not saying that's gonna be the next case filed by the s e c, but if , if you , uh, uh, analyze these , uh, these legal concepts that we've been talking about here and see what the s e c has done in other respects in insider trading , uh, including rules they've adopted and cases they've brought , um, you know , we can't assure people listening to this podcast or others that , uh, that the s e C isn't gonna try to, to , uh, go broader with this. And I have to stress here that every year there are a number of cases involving clinical trials, material non-public information, talked about the Lewis case earlier, but it's not the only one in , in recent months. And , uh, half of, in the period that , that I've studied recently, half of those cases have involved a criminal indictment. So the Department of Justice is interested in this as well. And I would say this is a , if we say nothing else, or you don't take anything else away from this podcast, it's , uh, you know , uh, uh, people at , uh, at any given institution could be next . 'cause the s e c is not cutting anybody , uh, any, any slack in here. And , uh, uh, and we think better training is appropriate, more training , uh, more sensitivity. But , uh, uh, even with these cases that have been around for many, many years back to the , uh, uh, into the 1990s, certainly the first case was brought , um, it doesn't seem to have brought much change in terms of , uh, prophylactic measures by these institutions to protect , uh, uh, their personnel from being embarrassed. I'm not suggesting the institution is at risk, but some of their personnel might be.

Speaker 3: 34:32

Do you think the , um, the s e c makes a cutoff in terms of , um, dollar amount or if you make a certain amount of profit, they will come after you?

Speaker 2: 34:41

Absolutely not. There's one case within the last , uh, I guess now it's about a year and a half where somebody's profit was less than $3,000. Uh , it was not a particularly egregious or unusual case, but , uh, they brought the case for whatever , uh, prosecutorial , uh, policy reasons. And that person settled by coughing up the profits. But I should stress what's at risk here is not just giving back the ill got and gain , if you will, but , uh, a penalty of as much as three times the amount of the profit and three times the profit of any people you tipped who traded and made money. And again, as I've mentioned a couple of times, the risk of the , uh, of the criminal indictment, which , uh, is for real.

Speaker 3: 35:22

Do we have any , um, insight on how we think the s e C is fighting these cases or determining?

Speaker 2: 35:29

Well, what they talk about a great deal in their ca in many of the insider trading cases is they have , uh, some very robust computers. So they claim as , as do the stock exchanges as well. And they look for unusual, unexplained, disparate trading patterns, which often reveal situations where somebody traded , uh, based on material non-public information. Uh , when they find those suspicious situations , uh, including the , uh, other people involved in the securities industry won't go into all the details about that, but they have their computers as well. Then they will start a , uh, preliminary inquiry and , uh, informal inquiry and get , uh, as they have the right to do records from brokers. Uh, and they often find , uh, uh, fire where there was that smoke. Sometimes it may be a tip. The s e c whistleblower program reveals , uh, a lot of , uh, information that ultimately matures into SS e c enforcement actions and recoveries of money. I won't go into the more depth about that, but there's a financial incentive to whistleblower. And so there are a lot of ways that the S E C can come upon this , uh, and , uh, mature into , uh, into a case, and I've implied here, but I'll say it explicitly. They share their fruits of their investigations when they think it's appropriate with the Department of Justice, they have the right to do so, and then it's up to the Department of Justice whether they want to indict. So we've raised a lot of issues and I hope given some guidance on what we think should be done , uh, uh, we would like to encourage anybody listening who's involved in or represents a , uh, research institution to give serious thought to , uh, you know, an hour every year or so on insider trading training. I know it takes time. Um, somebody's gotta do the training and somebody's gotta spend the time listening to it. Uh, but , uh, I think they would be well served and avoid embarrassment if nothing else, to the institution to , uh, be mindful of , uh, the scope of the law here .

Speaker 1: 37:33

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