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Are You at Risk for Insider Trading Liability?

Many people at the University have access to confidential information of potential commercial value. That puts them at risk for insider trading liability.

While "insider trading" may conjure up images of Wall Street rogues delivering suitcases of cash in dark alleys, in fact many instances of insider trading prosecuted by the SEC involve much lower stakes and in many cases people who do not even work in securities firms or corporations. Two recent cases involve faculty at institutions much like Penn. The purpose of this note is to warn the Penn community of the risks of insider training.

What is insider trading? It involves purchasing or selling a security from or to a party other than the issuer, using "material, non-public information for personal financial gain." That means using significant information that has not yet been disclosed to the public to make extra money for yourself, your family or your friends. For example, a researcher who has advance knowledge about the efficacy of a drug and purchases the stock of the sponsoring pharmaceutical firm prior to a public announcement about the drug's effectiveness may violate rules against insider trading.

That is exactly the fact pattern behind recent charges brought by the SEC against an Associate Professor of Neurology at Columbia University. The neurologist helped to evaluate Myotrophin, a new drug developed to treat Lou Gehrig's disease. He traded the stock of Cephalon Inc. based upon knowledge that he gained while conducting confidential clinical trials for the company in 1995. In their lawsuit, the SEC charged that the neurologist had made more than $26,000 in illegal profits by purchasing Cephalon stock just a few weeks before he knew the company was to announce positive findings about the drug.

Passing confidential information on to friends or family so that they may profit, sometimes called "tipping," also violates insider trading rules. The SEC has filed charges against a Professor of Medicinal Chemistry and Pharmacology at the University of Minnesota who served as a scientific advisor to Cephalon and allegedly passed secret information on to his sons, who then purchased stock. In that case, the SEC has also filed charges against both of the professor's sons despite the fact that they claim to have made no profits from their securities trades.

Many scientists, engineers and physicians at Penn are involved in research studies that are of commercial as well as scientific importance.

Individuals potentially at risk for insider trading liability include those who have access to research results before they are made public and who also own or purchase securities in companies that develop the research results. This includes a wide range of personnel, from the head of the research project to the scientist who runs the laboratory to the administrative assistant who types the research report. It is critical that all personnel with direct or indirect access to confidential information understand the rules about insider trading.

A recent article in the New England Journal of Medicine (Vol. 337, No. 9, pp. 631-634) discusses biomedical research and insider trading. In the concluding paragraph, the author states, "Four points emerge from this discussion of biomedical research and insider trading. First, in certain circumstances, the results of biomedical research can constitute a form of insider information and trigger the application of the federal securities laws. Second, a corporate employee who trades on the basis of such knowledge risks civil or criminal liability under the federal securities law. Third, a corporate outsider who trades on such information risks liability under both the securities laws and the mail-fraud statute if, by trading on the information, the person breaches a fiduciary duty to his or her employer or another party. Finally, as a general rule, to avoid liability, a person entrusted with research data under conditions of confidentiality should refrain from trading on the information before it has been made public."

The article provides a good summary of the statutory framework governing insider trading. If you think you may be at risk for insider trading liability, we recommend that you read the article carefully and consult your attorney. Any questions about the University's policy should be addressed to the General Counsel's office.

-- Ralph Amado, Vice Provost for Research

-- Richard Tannen, Vice Dean, School of Medicine

-- Shelley Green, General Counsel

-- Kathy Engebretson, Vice President for Finance

Return to:Almanac, University of Pennsylvania, January 13, 1998, Volume 44, Number 17