What Tipped off the SEC to an FDA Chemist's Alleged Insider Trading?
What's missing among the SEC's detailed charges of insider trading against FDA chemist Cheng Yi Liang is how the government was tipped off to Liang's (alleged) shootin'-fish-in-a-barrel, clandestine trades—which occurred (again, allegedly) over a span of at least 4-1/2 years and to the tune of more than $3.6 million in profits. It's mere speculation here, but the tipoff (or at least a contributory tipoff) may have been what it always seems to be historically. That is, living too large for one's income.
A hint that leads to this highly speculative conclusion is provided by the SEC's complaint, in which it's charged that Liang wrote $65,000 worth of checks to car dealerships for a "luxury" Infiniti sedan and Honda Odyssey minivan sometime between 2006 and the present. The complaint doesn't provide Liang's salary, but the FDA website indicates that a chemist most commonly earns an annual salary at the General Schedule levels of 9 through 13—which ranges presently (according to this site) from about $51,000 to $155,500 in the DC area. The higher end isn't chump change (particularly for a government job), but in the grand scheme of chemist's salaries, it's not huge either.
It's a brand new car! Promotional photo of Honda Odyssey minivan from http://automobiles.honda.com/odyssey/exterior-photos.aspx.
Addendum: Industry chemist and blogger-extraordinaire Derek Lowe suspects that the tipoff was Liang's profits from the "suprise approval" of the antipsychotic iloperidone (Fanapt; Vanda Pharmaceuticals) on March 6, 2009. He writes,
It wouldn't surprise me if this was the one that blew up the whole business. That was such an unexpected [Lowe's link] move by the FDA (after which the stock went up by a factor of six) that the SEC must have gone back and carefully checked to see if anyone had been building up a position beforehand.
Here's Vanda's stock price chart, from MSN Finance, for the relevant period, showing an astonishing 10-fold jump after the FDA announced iloperidone's approval.
According to the SEC, between March 30 and April 29, Liang acquired 125,065 shares at an average unit price of $1.08. From May 6th to the 14th, he sold all of his shares at an average unit price of $9.40, for a profit of more than $1 million. Liang's other alleged insider transactions yielded much lower gains, ranging from $9287 to $379,602. Of course, Lowe's suspicion relies on the assumption that the SEC is or has been appropriately vigilant for such exceptional trading activity.
