Former FDA Deputy Director Charged With Insider Trading for Leaking Non-Public Approval Information

A former Deputy Director of the US Food and Drug Administration’s (FDA) Office of Generic Drugs (OGD) was charged on Wednesday for providing tips on drug approvals to three hedge fund managers that made tens of millions off of the non-public information.

The Securities and Exchange Commission (SEC) announced the charges of insider trading against two hedge fund managers and their source, Gordon Johnston, who worked for a dozen years at FDA and leaked approval information to two of the hedge fund managers, one of whom reaped unlawful profits of nearly $32 million for hedge funds investing in health care securities.

Johnston has pleaded guilty, according to prosecutors cited by Bloomberg.

The SEC said Johnston remained in close contact with the former colleagues while working as vice president of regulatory sciences at the Generic Pharmaceutical Association (GPhA), from which he resigned in 2011 and worked as the group’s representative to FDA.

“Johnston concealed his separate role as a hedge fund consultant and obtained confidential information about anticipated FDA approvals for companies to produce enoxaparin, a generic drug that helps prevent the formation of blood clots,” SEC said. Johnston allegedly funneled to one of the hedge fund managers the details of his conversations with FDA personnel, including a close friend he mentored during his time at the agency and who still currently works with FDA.

“Between late 2009 and early 2010, Johnston learned from an OGD Division Director, who was a friend and former mentee to Johnston and with whom Johnston had a decades-long close and personal relationship (the ‘FDA official’), that an enoxaparin ANDA [abbreviated new drug application] was ‘moving’ toward approval, meaning that OGD's approval was becoming more imminent,” according to the complaint. “Johnston was immediately aware, upon learning this information, that he had received valuable nonpublic information. In particular, Johnston knew that the approval of an enoxaparin ANDA was valuable news because it would be the first time a generic counterpart to the brand-name drug Lovenox was approved.”

That manager then traded in advance of public announcements concerning FDA approvals for such companies as Momenta Pharmaceuticals, Watson Pharmaceuticals and Amphastar Pharmaceuticals.

Andrew Ceresney, Director of the SEC’s Division of Enforcement said the hedge funds “made millions by trading on nonpublic FDA drug approval information not available to the rest of the stock market.”

As FDA deals with reams of non-public information, and as many FDA employees formerly worked in industry and vice versa, this isn’t the first time an FDA official has been charged with insider trading. In 2012, Cheng Yi Liang, a former FDA chemist was sentenced to five years in prison for engaging in insider trading on multiple occasions based on material, non-public information he obtained in his capacity as an FDA scientist. 

FDA Deputy Commissioner for Operations and COO Walter Harris in 2014 also testified before the House Committee on Oversight and Government Reform about monitoring FDA personnel’s use of the agency’s IT systems, saying, “FDA personnel are permitted access to information provided to the Agency by medical product sponsors and others and are required to maintain the strict confidentiality of that information.”

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