The arrest of a French doctor on insider trading charges in the US has turned the spotlight on how much a clinical trial skidding off course can move markets and the extent to which investment managers may go to avoid the repercussions.

The charges are that, between November 2007 and January 2008, Yves Benhamou abused his dual position as a steering committee member on a clinical trial of Human Genome Sciences’ (HGSI) Albuferon (albinterferon alfa-2b) for hepatitis C and as a consultant to hedge finds and other investors trading in healthcare stocks.

He did this by tipping off a portfolio manager at a hedge fund group – identified in the media as Dr Chip Skowron of FrontPoint Partners – about a setback in the trial that would have lost associated hedge funds around US$30 million once it was disclosed.
Benhamou was arrested in Boston, Massachusetts on one count of conspiracy to commit securities fraud and one count of securities fraud for his alleged role in the insider trading scheme.

According to the United States Attorney for the Southern District of New York, where the US Securities and Exchange Commission has filed a District Court complaint against Benhamou, the doctor faces a maximum sentence of five years in prison on the conspiracy charge and 20 years’ prison on the securities fraud charge.

Specifically, Benhamou is alleged to have passed on to Skowron undisclosed information about serious adverse events that occurred during the Albuferon trial, including one fatality and a case of lung disease in another patient.

As a result, the SEC said, Skowron directed six hedge funds to sell all their remaining holdings of HGSI common stock on “key dates prior to HGSI’s announcement of negative news concerning the trial, including minutes before the close of the markets on 22 January, 2008”.

On 23 January, the SEC noted, the company publicly announced that all patients administered the higher dose of Albuferon in the Phase III trial would be moved to the lower dose on safety grounds. The higher dose was “believed, until then, to have greater commercial potential than the lower dosage” and HGSI’s share price fell by around 44% to US$5.62 on the back of the bad news, the Commission pointed out.

In total, the hedge funds involved sold some six million shares of HGSI common stock in advance of the announcement, thereby avoiding “at least US$30 million” in losses. They went back into the market after HGSI’s disclosure and purchased more shares of the company’s common stock at a reduced price, the SEC said.

By “profiting from his sensitive position and providing the hedge fund an unfair advantage, Benhamou undermined the integrity of the securities market and sold out his employer”, commented Preet Bharara, US Attorney for the Southern District of New York.

As well as serving on the steering committee that oversaw the Albuferon trial, Benhamou was the country lead investigator for the study in France and other parts of Europe.