On March 29, 2011, the United States Department of Justice unsealed a criminal complaint in the District of Maryland that charges Gaithersburg, MD residents Cheng Yi Liang, 57, and his son, Andrew Liang, 25, with conspiracy to commit securities and wire fraud, securities fraud and wire fraud relating to their trading in the securities of five companies:
The Liangs were arrested at their residence and appeared in U.S. District Court in Maryland
NOTE: A criminal complaint, which is not an indictment, is merely an accusation, and a defendant is presumed innocent unless and until proven guilty beyond a reasonable doubt in a court of law.
Allegedly, since 1996, Cheng Yi Liang was employed as a chemist at the Food and Drug Administration's (FDA's) Office of New Drug Quality Assessment (NDQA), where he had access to the Document Archiving, Reporting, and Regulatory Tracking System (DARRTS), the FDA's password-protected internal tracking system for new drug applications. The complaint alleges that through unauthorized means that included accessing DARRTS, Cheng Yi Liang reviewed confidential non-public documents ("inside information") relating to whether and when certain drug applications would be approved.
SIDE BAR: According to the FDA:
Document Archiving, Reporting, and Regulatory Tracking System (DARRTS): A CDER information technology (IT) platform intended to replace many of CDER's core tracking systems, including components of the Center-wide Oracle-based Management Information System (COMIS), the Division File System (DFS), and CDER Standard Letters and Forms (CSL). DARRTS is currently the archival system of record for all investigational new drug applications (INDs), Emergency Use Applications, drug master files, and TSIs. Ultimately, it will be the archival system of record for new drug applications (NDAs), biologics license applications (BLAs), and abbreviated new drug applications (ANDAs) as well.
[Note: CDER is the FDA's Center for Drug Evaluation and Research].
From approximately November 2007 through March 2011, Cheng Yi Liang and Andrew Liang allegedly realized at least $2.27 million in profits from the inside information by repeatedly trading in securities issued by companies with pending drug applications. 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; thereafter, the proceeds were transferred to various bank and brokerage accounts benefitting the father and son.
Apparently, on Jan. 6, 2011, the Department of Health and Human Services, Office of the Inspector General (HHS-OIG) installed software on Cheng Yi Liang's work computer that took screen shots from that computer. That data revealed Liang's use of DARRTS to review information related to a pending drug application submitted by Clinical Data Inc. for an anti-depressant drug called Viibryd.
On Jan. 18, 2011, the software showed Liang had reviewed an internal FDA document recommending approval of Viibryd. Allegedly, within minutes after such access, several accounts controlled by Liang and his son purchased 4,875 shares of Clinical Data - ultimately the Liangs acquired 48,875 shares of Clinical Data before Viibryd's approval was announced on Jan. 21, 2011. Thereafter, the Liangs sold their entire position for at least a $379,000 profit.
Similarly, it is alleged that the Liangs 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.
The maximum penalties that the Liangs face are
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) filed a civil enforcement action against Cheng Yi Liang in the District of Maryland.
In the Securities and Exchange Commission v. Cheng Yi Liang, et al., (Civil Action No. 8:11-cv-00819-RWT (D. Md.)), the SEC Complaint charged Chen Yi Liang, 57, a former FDA chemist in its Center for Drug Evaluation and Research, with insider trading involving at least 27 public announcements about FDA drug approval decisions involving 19 publicly traded companies for illicit profits/avoided losses of at lease $3.6 million. In addition to Defendant Liang, the SEC's Complaint names six Relief Defendants for the purpose of recovering allegedly ill-gotten funds to which they have no legitimate claim:
NOTE: The SEC Complaint is merely an accusation and the various defendants are presumed innocent unless and until proven guilty in a court of law.
As to the companies that were allegedly traded by Liang, the SEC sets forth the following list (Note: all securities are traded on the NASDAQ with the exception of Novadel Pharmaceuticals, Inc., which is traded on NYSE Amex; and all companies are/were Delaware corporations):
On June 2, 2011, the SEC amended its Complaint to add charges that Liang traded in advance of a 28th drug approval announcement used an eighth brokerage account in the name of his 87-year-old father, Zhaozheng Liang, to trade beginning in January 2011 and in advance of the XenoPort and Clinical Data, Inc. announcements. The amended complaint also names Zhaozheng Liang as a relief defendant. The SEC'S civil action against Liang and several accounts he controlled is still pending.
On October 18, 2011, Liang pleaded guilty to one count of securities fraud and one count of making false statements. At his scheduled sentencing on Jan. 9, 2012, he faces a maximum penalty for:
As part of his plea agreement, Liang agreed to forfeit $3,776,152, including a home and condominium in Montgomery County, Md., along with funds held in 10 bank or investment accounts.