The Securities and Exchange Commission said yesterday it filed insider trading charges against two clinical drug researchers who tipped off friends and family that a Maryland company's new hepatitis drug had weak trial results.
Thomas Newkirk, an attorney and associate director for the SEC's enforcement division, said the civil cases are the first insider-trading actions against drug researchers for illegally providing investors the results of a clinical trial.
Michael P. Moore, the senior counsel in the SEC's enforcement division who led the investigation, hopes the case will remind doctors and others working on clinical drug trials that they "are essentially temporary insiders" of the company that pays for the trial.
"I think this sends an important message to the medical community that they cannot improperly disclose confidential information that essentially belongs to a public company."
One researcher's wife also was charged with illegally disclosing confidential information about the results. At least nine others were charged with receiving the inside information that allowed them to sell shares in the Maryland company and a California company which held some marketing rights to the drug.
The shares were sold before the outcome of the clinical trial was made public April 28, 1994, the SEC said.
The SEC alleged the defendants sold stock in Alpha 1 Biomedicals, Inc., of Bethesda, and SciClone Pharmaceuticals, Inc., of San Mateo, Calif., to avoid losing about $300,000 on stock and warrants in the two companies.
The SEC alleges that two physicians running the clinical trial, Dr. Milton Mutch-nick, and a subordinate, Dr. Rangarao Panguluri, learned April 25, 1994, that Alpha 1's hepatitis drug, Thymosin alpha 1, had performed no better than a placebo.
The results made it unlikely that Alpha 1 could soon win Food and Drug Administration approval, a key step needed for the drug to be marketed commercially.
Mutchnick and Panguluri were Wayne State University researchers at the time and were under contract with Alpha 1 to oversee the clinical trial. Mutchnick was the lead investigator for the trial and Panguluri was his associate.
Neither was an employee of Alpha 1 or SciClone, which at the time held the foreign marketing rights to the drug. Alpha 1 has since turned over the drug to SciClone for development.
Michael Berman, chief executive officer and president of Alpha 1, said the company was dismayed to learn of the charges. He said the company has since strengthened its policy of stressing to consultants and outside researchers that it is illegal for them to disclose confidential company data.
According to an SEC civil complaint filed yesterday in Washington, Mutchnick and his wife, Renee Mutchnick, gave the trial results to a group of six friends and family members on the evening of April 25, 1994.
The SEC charged that those receiving the information immediately sold their stock in the two companies.
The Mutchnicks have agreed to settle SEC charges without admitting or denying guilt, said Robert Sickels, a Southfield, Mich. attorney who represents Mutchnick.
As part of the settlement, the Mutchnicks have agreed to pay a civil penalty of $163,494, the SEC said.
The penalty is equal to the losses the people they tipped off would have suffered had they not sold their stock before the clinical trial results were made public.
Alpha 1 announced the poor clinical results April 28, 1994, and both its stock and SciClone's shares lost more than 60 percent of their value that day, the SEC said.
Sickels, Mutchnick's attorney, said his client settled the charges to avoid a protracted legal battle.
"Dr. Mutchnick is a wonderful human being who got caught up in something he didn't fully understand," Sickels said. "He did not financially benefit in any way from this alleged incident."
Others charged in connection with the Mutchnick case, the SEC said, include Michael DeWood, Dennis Gill, Yvonne Graham, Paul Holloway, William Leuchter and Richard Liebich. All are residents of either Ohio or Michigan.
Moore, the SEC investigator, said his investigation determined that all of these defendants are either related to the Mutchnicks or served with the couple in the Ohio Air National Guard.
They have agreed to settle their cases and turn over to the SEC the losses they avoided by selling their stock and to pay penalties, according to the SEC.
The stock losses the individuals avoided with the inside information, said the SEC, ranged between $4,900 and $90,488.50.
In a separate civil case filed Wednesday in a California federal court, the SEC charged that Panguluri tipped off Dr. Ravindra Alapati and Dr. Syam Gaddam, both of Orange County, Calif.
At the time, according to the SEC, Panguluri was negotiating to join Alapati and Gaddam's medical practice.
Panguluri's attorney, Joseph Angelo of Orange County, Calif., could not be reached for comment yesterday.
According to the SEC, Alapati and Gaddam immediately sold shares of stock they held in SciClone and Alpha 1 after Panguluri's tip, thereby avoiding losses.
The SEC further charges that Alapati tipped off a professional colleague, Dr. Ravi Makam, also of Orange County, Calif.
Makam sold off his stock in SciClone and avoided losses of more than $59,000, the SEC alleges.
The SEC further alleges that Alapati, Gaddam, and Makam provided alibis to cover up their insider trading activity.
"This is a clear example that it's not just people on Wall Street who have to worry about illegally providing inside stock information, but anybody who has access to confidential, non-public information," said Newkirk of the SEC.
Pub Date: 4/11/97