Two high-level biopharma executives are among seven people who face U.S. Securities and Exchange Commission (SEC) charges of racking up $1.7 million in illegal profits and kickbacks through insider trading in advance of 11 announcements that include mergers, a drug approval application, and quarterly earnings of drug and medical technology developers.
Celgene's director of financial reporting John Lazorchak and Sanofi's director of accounting and reporting Mark S. Cupo were two among seven members of what authorities called an “insider trading ring” who illegally tipped others off to confidential information about their companies. While the nonpublic information mostly involved upcoming mergers or acquisitions, Lazorchak also tipped confidential details about Celgene's quarterly earnings and the status of the company’s application to expand the use of its drug Revlimid (lenalidomide).
SEC said the insider traders hoped to avoid detection by including nontrading middlemen who received the nonpublic information from the insider and tipped others, in exchange for cash payments made in installments to avoid the scrutiny of large cash withdrawals.
Cupo's friend Michael Castelli, and a high school classmate of Castelli, Lawrence Grum, served as primary traders, SEC alleges. The agency accuses them of trying to hide their illegal conduct by compiling binders of research that served as a false basis for their trading, and by actively trading in Celgene stock to create a pattern of long-standing positions.
Charged additionally were Lazorchak's high school friends Michael T. Pendolino of New Hampshire and James N. Deprado of Virginia; the other defendants live in New Jersey.
According to the SEC complaint, the insider trading ring began in 2007 when Lazorchak left Sanofi, where he had worked with Cupo, for Celgene. Lazorchak told Cupo he was initially working on Celgene's possible acquisition of Pharmion. Cupo discussed Lazorchak's position with a friend, Castelli, who in turn brought in Grum.
SEC alleges that Castelli and Grum devised the scheme in which Lazorchak offered nonpublic Celgene information to Cupo, who in turn tipped Castelli and Grum so they could trade based on the insider info. Castelli and Grum paid Cupo, and gave him money to pass along to Lazorchak, who never never knew the identities of Castelli or Grum, but did know Cupo was passing confidential Celgene information to others.
Another high school friend of Lazorchak—Mark D. Foldy, a marketing employee with medical device maker Stryker—joined the ring in 2007, the agency said, when Lazorchak tipped him with confidential details about the merger of Celgene and Pharmion, upon which Foldy illegally traded prior to public announcement of the deal. After Foldy obtained $14,500 in profits, Lazorchak repeatedly demanded that he be compensated for the inside information. Foldy ultimately paid Lazorchak at least $500 and later offered him illegal tips of confidential information about a tender offer involving Stryker. Lazorchak did not trade, but tipped off Pendolino so he could carry out the trade. Pendolino tipped Deprado, who also traded, while Lazorchak additionally tipped Cupo, who acted as a middleman and tipped Castelli and Grum, who both traded.
According to the complaint, Cupo began tipping inside information about his employer in 2009 when he learned in advance of the announcement that Sanofi planned to announce a tender offer to acquire drug developer Chattem. He tipped Castelli and Grum, who both traded on the nonpublic information.
(Read the full complaint here.)
SEC charged all seven defendants violating two antifraud provisions of the Securities Exchange Act of 1934, Sections 10(b) and 14(e), while Castelli and Grum were additionally charged with fraud under Section 17(a) of the Securities Exchange Act of 1933. SEC is seeking permanent injunctions, disgorgement of ill-gotten gains with interest, financial penalties, and stipulations barring officer and director roles in public companies for Lazorchak, Cupo, and Foldy.
SEC—which said its investigation is continuing—brought the charges along with the U.S. Attorney's Office for the District of New Jersey, with help from the FBI, the Financial Industry Regulatory Authority, and the Options Regulatory Surveillance Authority.