Insider Trading and Clinical Trials

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INSIDER TRADING AND CLINICAL TRIALS By Donald F. Crane* We are asked regularly about guidelines as to when it is appropriate to buy or sell stock in a public company. One context in which this often comes up is during clinical trials conducted by life sciences companies. In view of recent attention by the Congress and the SEC (see New York Times August 9, 2005), we thought it would be useful to call your attention to this important subject. Insider Trading in Clinical Trials In general, a person may not buy or sell stock in the public markets when aware of material information that is not available to the public and has been gained through a confidential relationship. Illegal insider trading occurs by use of inside knowledge to gain a trading advantage – profiting or avoiding losses – to the detriment of the rest of the market that does not yet have access to this information. Starting with a few basic, but important, concepts:  Information is material if it would be considered important in the total mix of information a reasonable investor would consider in making an investment decision. 

 

 

INSIDER TRADING AND CLINICAL TRIALS By Donald F. Crane* We are asked regularly about guidelines as to when it is appropriate to buy or sell stock in a public company. One context in which this often comes up is during clinical trials conducted by life sciences companies. In view of recent attention by the Congress and the SEC (see New York Times August 9, 2005), we thought it would be useful to call your attention to this important subject. Insider Trading in Clinical Trials In general, a person may not buy or sell stock in the public markets when aware of material information that is not available to the public and has been gained through a confidential relationship. Illegal insider trading occurs by use of inside knowledge to gain a trading advantage – profiting or avoiding losses – to the detriment of the rest of the market that does not yet have access to this information. Starting with a few basic, but important, concepts:  Information is material if it would be considered important in the total mix of information a reasonable investor would consider in making an investment decision.  In the case of clinical trials, insider knowledge as to the outcome of or problems with a clinical trial would ordinarily be highly material, especially in the case of a clinical trial regarded as important to a company’s prospects. Few developments would be more important to the market for the stock of a life sciences company than one likely to affect the outcome of a clinical trial on a potential product.  An insider is not only a corporate officer, director, or employee, but can be someone in a contractual relationship of confidence with the company – such as a physician, or consultant, assisting with conducting or evaluating a clinical trial. These persons can be considered temporary insiders of the company because of their knowledge of material, non-public information.  An insider with this “inside information” may not trade until the information is made available to the public through appropriate press releases to the market.  Violations – insider trading – subject the insider to criminal prosecution, including imprisonment and severe monetary penalties, and to civil enforcement by the SEC – including recovery of up to three times the illegal profit or loss avoided.  “Tipping”, or disclosing the inside information to someone else who trades unfairly, is also prohibited and subjects the person who gave the tip to criminal sanctions and to penalties based upon the profits made by the “tippee” - even if the insider did not themselves trade in the stock! This is especially important in the context of clinical trials. For example, an insider who gives a securities analyst information about toxicity discovered in a drug trial has tipped the analyst, and if the analyst trades or issues research based on that information the insider can be held responsible for the resulting trading. In the case of clinical trials, the Securities and Exchange Commission has brought enforcement actions against individuals for trading in company stock prior to news releases about clinical trial results, and for discussing clinical trial results with Wall Street analysts searching for information about the company’s prospects with their pipeline. Congress has asked the SEC to look carefully at whether this practice is widespread. Most companies have comprehensive insider trading policies designed to deter this type of conduct, but it may be useful to review a few steps that can be helpful. A thorough and effective legal compliance plan, including adequate training, supervision and enforcement can be very important in deterring this misconduct. Effective compliance plans can also help avoid a direct criminal charge against the Company in the case of a rogue insider, or at least limit the chances that a federal prosecutor will level charges beyond the insider involved. We suggest that companies take the following steps to limit the likelihood of insider trading or inadvertent release of confidential material that could affect the market for the company’s stock.  Contracts with advisers and consultants on the clinical trials should be reviewed to ensure that they cover confidentiality, expressly refer to the fact that information about the trials is highly sensitive, not public until disclosed by the company (and only by the company unless required by law), and could be material under federal securities laws prohibiting insider trading. Companies may even prohibit trading by persons associated with their clinical trials for other reasons. In working with a CRO, companies should know the CRO policy for maintaining confidentiality and for trading in the stock of client companies, as well as their programs for training and enforcing these requirements.  Establish a designated point of reference for inquiries by anyone outside the company as to the status of clinical trials, as analysts or others interested in trading in the stock often contact investigators or monitors asking seemingly innocent questions about the progress of a clinical trial. Investigators and monitors should be advised specifically as to these procedures.  Ensure that disclosure controls procedures are effective for dealing with the inappropriate release of inside information (whether for trading purposes or not) for compliance with Regulation FD by U.S. companies. Non-U.S. companies may find it prudent to adopt similar practices to provide greater control over information flow.  Review their code of conduct and legal compliance plan to ensure that it is up to date and effective. Revised sentencing guidelines relating to responsibility of the corporation for criminal acts took effect in November, 2004, revising and expanding the standards for an effective compliance program. Some of the requirements for a plan to be deemed effective relate to training, auditing the program, support from the top, and a compliance officer with adequate resources, authority and direct access to the Board of Directors. By far, prosecutions of companies – or individual officers and directors – for criminal misconduct by other corporate employees - have been in cases where the company either had no code of conduct or it was ineffective. By contrast, very few organizations have been prosecuted where an effective code of conduct and compliance program was in place. Similarly, the Company’s plan must meet Sarbanes-Oxley standards, or it will not be able to disclose that it has a code of conduct, and stock market listing standards.  A company might consider establishing a plan under the SEC’s Rule 10b-5-1 for trading by corporate insiders based upon pre-established guidelines, in order to protect against charges of insider trading where an investment decision was not based upon insider information. We trust that this information is helpful. For assistance in a review of insider trading issues that could arise out of your clinical trial programs, or more broadly with your code of conduct and legal compliance plan, please contact us. We are here to help you. *Mr. Crane is Of Counsel with Kirton & McConkie, PC, resident in Princeton, New Jersey. He has previously served as senior securities and finance counsel with large public companies and as General Counsel of a public biopharmaceutical company. Before joining Kirton & McConkie, he enjoyed a brief sabbatical from his life sciences career by directing a U.S. Agency for International Development sponsored project for capital markets development in Eastern Europe. Mr. Crane maintains his practice in securities, life sciences, and emerging economies as a member of Kirton & McConkie’s international and life sciences teams. He may be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. or directly at 609 577 5048. Kirton & McConkie is a full service law firm with a global reach, handling assignments for companies in the United States, Asia, Latin America, and Europe. For further information, please see our website at www.kmclaw.com.