FDA Chemist and Son Charged with Trading on Inside Information

WASHINGTON—A Food and Drug Administration (FDA) chemist and his son were arrested in Maryland today in connection with an alleged $2.27 million insider trading scheme, announced Assistant Attorney General Lanny A. Breuer of the Criminal Division; U.S. Attorney for the District of Maryland Rod J. Rosenstein; James W. McJunkin, Assistant Director in Charge of the FBI’s Washington Field Office; and Elton Malone, Special Agent in Charge, Department of Health and Human Services, Office of the Inspector General (HHS-OIG), Office of Investigations, Specials Investigations Branch.

A criminal complaint unsealed today in the District of Maryland charges Cheng Yi Liang, 57, and his son, Andrew Liang, 25, both residents of Gaithersburg, Md., with conspiracy to commit securities and wire fraud, securities fraud, and wire fraud relating to their trading in the securities of five companies: Clinical Data Inc., Vanda Pharmaceuticals Inc., Progenics Pharmaceuticals Inc., Middlebrook Pharmaceuticals Inc., and Momenta Pharmaceuticals Inc. They were both arrested at their residence this morning and made their initial appearances in U.S. District Court in Greenbelt, Md. Law enforcement agents executed four search warrants today in connection with the investigation.

“Cheng Yi Liang was entrusted with privileged information to perform his job of ensuring the health and safety of his fellow citizens,” said Assistant Attorney General Breuer. “According to the complaint, he and his son repeatedly violated that trust to line their own pockets. Insider trading is an insidious crime. Together with our law enforcement partners, we will continue to root out corruption in our securities markets at every level. Our use of innovative investigative tools like the security software used in this case will provide an additional deterrent the next time someone sits in front of a computer and thinks about committing a crime.”

“It is unacceptable for any government employee to take confidential information and use it for personal gain,” said U.S. Attorney Rosenstein.

“Those in positions of trust, who have access to privileged and valuable information are expected to follow the law,” said Assistant Director in Charge McJunkin of the FBI’s Washington Field Office. “The charges today represent long hours and hard work by the special agents and investigators who are tasked with enforcing laws and regulations designed to ensure the fair operation of our financial markets.”

“Profiting based on sensitive, insider information—as Liang is charged with today—is not only illegal, but taints the image of thousands of hard-working government employees,” said Special Agent in Charge Malone of HHS-OIG Special Investigations Branch. “We will continue to insist that federal government employee conduct be held to the highest of standards.”

According to court documents, Cheng Yi Liang has been employed as a chemist since 1996 at the FDA’s Office of New Drug Quality Assessment (NDQA). Through his work at NDQA, Cheng Yi Liang had access to the FDA’s password-protected internal tracking system for new drug applications, known as DARRTS. FDA utilizes DARRTS to manage, track, receive, and report on new drug applications. The complaint alleges that by accessing DARRTS, and through other unauthorized means, Cheng Yi Liang was able to review confidential non-public documents or inside information, relating to whether and when certain drug applications would be approved.

The complaint alleges that from approximately November 2007 through March 2011, Cheng Yi Liang and Andrew Liang profited from the inside information by repeatedly trading in securities issued by companies with pending drug applications, allegedly reaping illicit profits of more than approximately $2.27 million. According to court documents, the trading was executed in accounts held in the name of Andrew Liang, as well as several accounts in the names of four different nominees. The proceeds from the Liangs’ insider trading were then transferred to various bank and brokerage accounts benefitting the father and son.

According to the complaint, on Jan. 6, 2011, HHS-OIG installed software on Cheng Yi Liang’s work computer, allowing it to collect screen shots from that computer, which revealed Liang was accessing the secure DARRTS database to review information related to a pending drug application submitted by Clinical Data Inc. for an anti-depressant drug called Viibryd. In one instance on Jan. 18, 2011, the software captured information that showed Liang accessed the database and reviewed an internal FDA document recommending approval of Viibryd. The complaint alleges that within minutes, several accounts controlled by Liang and his son purchased 4,875 shares of Clinical Data. Altogether, the defendants, through various accounts which they controlled, acquired 48,875 shares of Clinical Data before Viibryd’s approval was announced on Jan. 21, 2011, and subsequently sold their entire position for a profit of more than $379,000.

The complaint also alleges that Cheng Yi Liang and Andrew Liang traded in advance of a May 6, 2009, announcement by Vanda Pharmaceuticals Inc., that the FDA had approved its drug Fanapt. Utilizing Andrew Liang’s account and several nominee accounts, the Liangs allegedly made a nearly 800 percent profit, netting more than $1 million.

As described in the complaint, the defendants used the proceeds from the scheme to pay various personal expenses, including purchasing cars, paying for travel, and paying credit cards bills.

The maximum penalty for conspiracy to commit securities and wire fraud is five years in prison and a fine of $250,000, or twice the gross gain from the offence. The maximum penalty for wire fraud is 20 years in prison and a fine of $250,000, or twice the gross gain from the offence. The maximum penalty for securities fraud is 20 years in prison and a fine of $5 million for each count.

A criminal complaint is merely an accusation, and a defendant is presumed innocent unless proven guilty in a court of law.

In a related action, the Criminal Division’s Asset Forfeiture and Money Laundering Section (AFMLS) filed a civil complaint in the District of Maryland for forfeiture of proceeds from and property involved in the insider trading scheme, specifically, seven brokerage accounts, two bank accounts, and two pieces of real property. Also, the Securities and Exchange Commission (SEC) today filed a civil enforcement action against Cheng Yi Liang in the District of Maryland.

This case is being prosecuted by Trial Attorneys Kevin Muhlendorf and Thomas Hall of the Criminal Division’s Fraud Section, Assistant U.S. Attorney David Salem for the District of Maryland, and AFMLS Senior Trial Attorney Pamela J. Hicks. The case was investigated by the FBI’s Washington Field Office, the HHS-OIG, and the Market Abuse Unit of the SEC’s Enforcement Division. The investigation is ongoing.

This prosecution is part of efforts underway by President Barack Obama’s Financial Fraud Enforcement Task Force. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes. For more information about the task force visit: www.stopfraud.gov.

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