In the first federal case involving allegations of insider trading against clinical drug researchers, a federal judge has ordered four Anaheim physicians to pay a total of nearly $350,000 in disgorged profits, avoided losses and penalties.
"The lesson to be learned is simple: Medical researchers who trade on this kind of inside information will be found and prosecuted and the penalties will be severe," said Peter H. Bresnan, a lawyer for the Securities and Exchange Commission, which brought the case.
U.S. District Judge Gary L. Taylor in Santa Ana last week issued the order penalizing Drs. Rangarao Panguluri, Ravi Makam, Ravindra Alapati and Syam Gaddam, along with Gaddam's wife, Gowtami. They admitted no wrongdoing but consented to the judgment and agreed not to violate securities laws.
The physicians and their lawyers couldn't be reached for comment. Panguluri, Alapati and Gaddam practice medicine together, according to their office workers.
The government last year accused Panguluri, a former Wayne State University researcher, of tipping a group of Anaheim physicians about negative results of late-stage tests on an experimental drug to treat the liver ailment hepatitis B.
The government alleged that on April 25, 1994, Panguluri learned that patients given the drug "Thymosin alpha 1" fared no better than those given a placebo. He allegedly told his friends, Alapati and Gaddam, whose medical practice he intended to join.
The complaint alleged that Alapati and Gaddam immediately sold all the stock they held in two companies--Alpha 1 Biomedicals Inc., of Bethesda, Md., then the drug's developer, and San Mateo-based SciClone Pharmaceuticals Inc., which holds marketing rights.
Alapati allegedly profited by selling short--selling stock that wasn't owned in anticipation of buying the shares later at a lower price. The government also claimed that Alapati tipped his friend, Makam.
Alapati, Gaddam and Makam gave phony alibis and enlisted the help of others in an attempt to cover up the alleged insider trading, the government charged.
Taylor ordered four of the defendants to repay double the amount of their profits or avoided losses on the stock. Alapati agreed to pay a total of $122,000; Makam, $118,650; and the Gaddams together, $33,862. Panguluri agreed to pay a penalty of $75,000--for profits and avoided losses for those he allegedly tipped.
Alpha 1 announced the disappointing results of the drug test on April 28, 1994. Shares of both Alpha 1 and SciClone dropped that day by about two-thirds.
Other defendants settled a related case last year. Dr. Milton Mutchnick, a lead researcher on Alpha 1, and his wife, Rene, agreed to pay $163,000 and admitted no wrongdoing, their lawyer said at the time. The Mutchnicks, who didn't buy or sell the stock themselves, allegedly tipped off relatives and friends who did.
Donald Sellers, SciClone's chief executive, said Thursday that later tests proved the drug's safety and effectiveness as a treatment for hepatitis B. The drug now is sold overseas in several markets including China, Singapore and the Philippines.
It is also in late-stage U.S. trials as a treatment in combination with interferon for another liver ailment, hepatitis C.