The Massachussets Secretary of the Commonwealth has filed a complaint that accuses a hedge fund of making profits on two pharmaceuticals stock by using insider information. Specifically, Risk Reward Capital Management was charged with using a so-called expert consultant to obtain advance info about an Ariad Pharmaceuticals clinical trial and a forthcoming abstract about a med sold by Questor Pharmaceuticals.
According to the complaint, Risk Reward principal investment advisor James Silverman* retained Guidepoint Global for an $80,000 annual fee in exchange for obtaining alleged insider info. He hired the firm in early 2008, after his fund lost 16.9 percent in 2007, which was his first year of operation.
Ultimately, Guidepoint arranged for him to meet with 225 experts, about 60 percent of whom were clinical investigators with confidentiality agreements. And guess what? In 2009, Risk Reward returned 55 percent in 2009 and another 52 percent last year. "These returns were generated, at least in part, upon Silverman’s receipt of material non-public information he received through Guidepoint consultations," the complaint states.
With Ariad, Silverman was interested in interim trial results for the AP245334 cancer drug and used Guidepoint to access clinical investigators working on the trial. And they revealed interim results, such as patient reactions, before being made public, even though they were barred by confidentiality from discussing the Phase One trial under way, the complaint states. They were each paid between $400 and $1,000 an hour through Guidepoint. Silverman then bought 263,500 Ariad shares and when the drugmaker released preliminary data, the stock rose by 30 percent in one day.
As for Questcor, Silverman spoke with a doctor who prepared an abstract about the Acthar Gel before the data was disclosed at a meeting held by the American Society of Nephrology last year. There was, however, an embargo in place and the regulator maintains that Silverman should have known this. In testimony before state regulators, Silverman offered this explanation when asked about the breach of confidentiality: "I mean part of the reason – part of the advantage of using like a Guidepoint...for this type of services is that they are acting as the intermediary, you know, for their clients, so they – you know, they presumably would educate the doctors, you know, on, hey, if you have nondisclosure agreements, you can’t do calls and educating them on what insider information is so they are not taking calls," according to the complaint.
But what was he telling his investors? After two difficult years, he was proud to say that his fund battled its way back into positive territory (and that) "I will certainly never be able to proces (sic) how the stock market will perform." Of course, he allegedly had more help than most. You can read the complaint here and the exhibits, which include his notes of conversations with doctors, here.
*Silverman is not a relation.