[Secret IRS records reveal dozens of highly fortuitous biotech and
health care trades. One executive bought shares in a corporate partner
just before a sale, and an investor traded options right before a
company’s revenues took off, netting millions. ]
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EXECUTIVE TRADING IN HEALTH CARE STOCKS  
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Ellis Simani and Robert Faturechi
June 22, 2023
ProPublica
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_ Secret IRS records reveal dozens of highly fortuitous biotech and
health care trades. One executive bought shares in a corporate partner
just before a sale, and an investor traded options right before a
company’s revenues took off, netting millions. _

, Mr.Nelson design, special to ProPublica. Solskin, smartstock,
Bet_Noire, hedge111, EschCollection, autsawin/Getty Images

 

The case was a bold step for the Securities and Exchange Commission.

In 2021, the agency accused Matthew Panuwat of insider trading. Five
years earlier, he had learned that his own company, a biopharma
operation called Medivation, was about to get acquired. But instead of
buying shares in his employer, he bought options in a competitor whose
stock could be expected to rise on the news. The agency says he made
$107,000 in illicit profits.

For the first and so far only time, the SEC filed a case that accuses
an executive of using secret information from his own company to trade
in the stock of a rival
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“Biopharmaceutical industry insiders frequently have access to
material nonpublic information” that impacts both their company and
“other companies in the industry,” Gurbir Grewal, the
commission’s director of enforcement, warned in announcing the case.
“The SEC is committed to detecting and pursuing illegal trading in
all forms.”

One of the cornerstones of the agency’s case against Panuwat
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is that Medivation had a policy that explicitly barred employees from
buying or selling competitors’ stock based on company information
not available to ordinary investors.

It wasn’t just Panuwat who risked violating Medivation’s policy, a
trove of confidential IRS data obtained in recent years by ProPublica
shows.

It was also his then-boss, CEO David Hung.

The records show Hung traded frequently in the stock and options of
pharmaceutical companies, betting tens of millions of dollars on the
rise or fall of shares of dozens of such firms, some of which were
direct competitors with his company. Several of his trades came just
before news about a rival that he could have learned about in his
position as CEO. In one case, he traded ahead of news he personally
announced.

The size of Hung’s trades dwarfs those that got his subordinate, who
has denied any wrongdoing, in the crosshairs of the SEC.

Hung’s spokesperson acknowledged the CEO has learned nonpublic
information about competitors, but denied that information ever
informed any of his dozens of trades.

Earlier this year, ProPublica revealed that some executives with
access to nonpublic industry information
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made remarkably well-timed transactions
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in the securities of their direct competitors and partner companies.
Securities law experts said many of the trades, which in some
instances rapidly delivered millions of dollars in profit, warranted
examination by regulators. The transactions ranged across sectors:
from energy to toys, paper products to mortgage servicers.

But one industry stood out for both its frequency and variety of
questionable trades: biotech and other relatively small health care
enterprises such as medical device makers and drug companies. Dozens
of wealthy executives and well-connected investors reported superbly
timed stock trades in such companies, including in businesses they
competed with or had personal ties to.

ProPublica has analyzed millions of transactions documented in the tax
records of the wealthiest taxpayers, including many of the nation’s
top business leaders. A high proportion of these trades involved plain
vanilla investments, with long-term holdings of blue chip stocks and
the like. But a minority of the transactions displayed what experts
say are hallmarks of potentially suspicious trading.

Finding well-timed trades was only a starting point for ProPublica’s
analysis. We then scrutinized transactions that occurred just before
market-moving news, particularly those that represented a departure
from an investor’s previous investing pattern, because they either
had hardly if ever traded a particular company's stock, were trading
an unusually high dollar amount or were making use of risky options
for the first time. We examined whether those people had any possible
nonpublic means of obtaining information about the companies whose
stock rose or fell at an opportune moment. We provided anonymized
descriptions of these trades to academics, former prosecutors and
former SEC officials, and focused on those they said should have
garnered the attention of regulators.

Among the notable examples:

The chairman of a biotech company bought shares in a corporate partner
just as the partner was reaching the final stages of secret
negotiations to be purchased.

The chairman of a bone health company made aggressive bets on a
medical technology firm run by an adviser to his board just before its
sales took off, netting him $29 million in a series of options trades.

A wealthy investor with ties to a niche area of cancer research
personally traded, for the first time ever, in a company in that
sector just before it was taken over. He bought high-risk options that
earned him a quick $1 million in profit.

An information edge can be lucrative in any industry, but especially
so in the health care sector. Many of its companies are built around
only one or a handful of products, making their shares particularly
volatile and ripe for profit by investors with inside knowledge.
Biotechs and other up-and-comers face clear make-or-break moments:
Clinical trials, signals from regulators or takeover rumors can cause
wild swings in share prices.

Since beginning to report on our massive trove of IRS records in 2021,
ProPublica has analyzed the data and used it as the basis for a series
of articles, The Secret IRS Files
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that reveal the many ways in which the tax code favors the rich and
how the ultrawealthy exploit those advantages.

The IRS data also included millions of records of wealthy taxpayers’
stock and options trades, provided by the brokerages that handled the
trades. While the SEC routinely reviews stock trading data from
brokers and exchanges, the agency does not have access to IRS data,
which in many ways is more comprehensive. (A spokesperson for the SEC
declined to comment for this article.)

The securities experts said there is no fixed definition of what makes
a trade suspicious and worthy of further investigation. A propitious
trade for a relatively small amount, for example, might still warrant
scrutiny if the investor has a tie to the company. One excellently
timed trade is less noteworthy if the investor frequently trades in
that security. A trade with a modest return could still be problematic
if it came before news the investor knew about in advance or set in
motion. And even if a trader’s investment strategy in a stock
wasn’t ultimately successful, a single lucrative trade could still
be deemed illegal.

The experts interviewed by ProPublica about the trading patterns
examined in this story said that while each should trigger closer
scrutiny from regulators, the question of whether they would lead to
any action would depend on a host of additional factors. They noted
that stock trades are generally deemed to violate insider trading laws
only when multiple elements are met. The trader must have had
information, not yet publicly known, that would affect the company’s
share price. And the trader, or the person who provided the tip, must
have had a duty not to disclose the information or use it for personal
benefit.

ProPublica’s records give no indication as to why investors made
particular trades or what information they possessed. The wealthy
investors named in this story either denied their trades were improper
or did not comment.

The personal trading policy for Medivation, the multibillion-dollar
company Hung ran, was particularly explicit. It warned its employees
to be careful trading the shares of competitors because Medivation’s
employees possess nonpublic information that can affect those
companies’ stock prices as well. “For anyone to use such
information to gain personal benefit,” the policy stated, “is
illegal.”

But ProPublica’s data show Hung, who has led a number of biopharma
companies and has been described in the press as a master dealmaker,
risked violating the company’s policy by trading in the securities
of competitors. During the decade-plus in which Hung led Medivation,
most of his proceeds from securities transactions in companies other
than his own involved the pharma sector.

With timely trading, he sometimes scored gains of hundreds of
thousands of dollars or managed to avoid a calamitous loss. (The
records show that he sometimes lost money as well.)

Securities experts with whom we described his trading patterns and
high-ranking role (but not his name) said the investments appeared to
show a top executive capitalizing on information not available to the
average investor.

In July and August 2011, Hung’s tax records show, he sold more than
a million dollars’ worth of stock in a company called Dendreon.
Dendreon was then producing a promising prostate cancer therapy that
Hung’s firm was competing against, working to get their own drug to
market. The day after Hung sold the last of his two roughly
half-million-dollar tranches of Dendreon stock in August, the
company’s share price fell 67% because of poor sales and a lack of
initial enthusiasm from doctors about its prostate cancer drug.

Industry experts said that when a pharmaceutical is in late-stage
development, as Medivation’s drug was at the time, the company will
normally have its representatives examine the competitive landscape,
including surveying doctors’ offices about rival drugs. And
business-side employees of companies, even competitors, frequently
mingle and trade gossip at conferences.

A few months later, in October 2011, Hung again bought shares of
Dendreon, but quickly made a U-turn days after, selling those shares
off for about $150,000, essentially the same price he had bought them
for. A week later, Hung announced that his company had learned that
trials had gone so well for its own prostate cancer therapy that the
drug was going to start being offered even to participants who had
been given a placebo. “These results are both an important step
toward making this life-extending potential treatment available to the
prostate cancer community and a significant milestone for our
company,” Hung said in a press release at the time.

Just as Hung announced his company’s promising results, Dendreon
released lackluster quarterly earnings. Its stock fell 37%.

David Nierengarten, an analyst who covered both companies at the time,
told ProPublica the earnings report caused most of the fall, but part
of it could also be attributed to Medivation’s clinical trial
results, which posed a threat to Dendreon’s market share. Hung’s
spokesperson said that Hung did not know the outcome of his
company’s clinical trials when he sold Dendreon’s shares.

Hung sold Dendreon shares on almost two dozen occasions over six
years, with most of the trades for less than $150,000. Hung’s
spokesperson denied he had any relevant nonpublic information when he
made his Dendreon trades.

In one instance, tax records show Hung traded a competitor’s stock
ahead of news he himself disclosed that experts said would likely
qualify as material.

On Aug. 24, 2015, Hung announced that Medivation was acquiring a
cancer-fighting medication from a company called BioMarin. The drug
was one of a handful of cutting-edge new drugs that Hung hailed as an
“exciting class of oncology therapeutics.”

What Hung didn’t say was that on the same day his company finalized
the acquisition — but three days before the public announcement —
he made a purchase in his personal stock trading account. He bought
about $8 million in shares of Clovis Oncology, a company that was
separately developing a drug in the same treatment category, known as
“PARP inhibitors.”

After the acquisition, the pharmaceutical trade press noted that there
was growing interest in this class of drugs. Hung’s deal marked the
first big acquisition of a PARP inhibitor.

“Obviously all the PARPs are going to pop,” said Nierengarten, the
analyst who covered Hung’s company. Clovis is a small company
reliant on a small number of drugs, “so it’s really going to
pop,” he said.

And it did. In the week after the Medivation agreement was announced,
Hung’s stock purchase paid off: The price of Clovis shares increased
by about 11%, a rise experts attributed partly to Hung’s drug
acquisition.

By the time Hung sold the shares the next month, he netted $1.25
million in profit.

Hung’s spokesperson defended the trades, saying Hung did not believe
Medivation’s acquisition of BioMarin’s drug would affect the share
price of a company that made a drug in the same class.He also said
most of the stock’s rise came in the days after the news of the
acquisition, not the day of, which he said indicated Hung’s profit
was attributable to other factors.

The Clovis shares that Hung bought represented the final step in what
records show was a series of complex transactions involving what are
known as stock options — arrangements to buy or sell a security at
some future date. In April 2015, Hung started selling Clovis “put
options.” That meant he was entering into a contract that gave
another investor the right to sell Clovis shares to him in the near
future at a specified price. It was essentially a bet by Hung that
Clovis shares would remain at roughly the same price or rise (a
sophisticated and unusual transaction for a typical retail investor).

In April and May, Hung sold a small number of his contracts. In June
and July, he began selling more frequently and in larger quantities:
17 times as many contracts as he had sold in the previous two months.
According to his spokesperson, this was around the time Hung was
approached to buy BioMarin’s drug.

The expiration dates for the options were staggered. A large group of
his contracts expired on the same day he finalized the drug
acquisition.

At that moment, Hung had two choices, both seemingly unpleasant.
According to his spokesperson, he likely could have paid cash to end
the contracts, which would have resulted in an immediate loss since
the options were for a higher stock price than Clovis was trading at
on that day. The contracts also allowed him to buy the specified
number of shares, a seemingly bad deal since he would pay anywhere
from $75 to $85 per share for stock that was trading at less than $73.

But on that day, Hung knew something the market didn’t: that his
company was about to announce it was buying Biomarin’s drug.

Hung bought about $8 million worth of Clovis shares. After his
company’s announcement, Hung was in the black in a matter of days,
even after he bought at the inflated price. The option trades had
worked out beautifully. He sold the shares the next month, turning
that $1.25 million profit.

Hung’s spokesperson pointed out that, taking into account all of the
Clovis options he sold that year, Hung actually lost about $100,000.
The time horizon for some of the contracts was much longer, with
expiration dates into the following year. Hung, he said, held on to
some of his contracts and ultimately lost money when the price of
Clovis shares declined significantly a few months later. The
spokesperson also said that someone trying to capitalize on nonpublic
information could do so more efficiently by buying shares in a company
rather than through a complicated series of options trades.

ProPublica described Hung’s options dealing in Clovis, without
revealing his identity, to Dan Taylor, a professor at the Wharton
School and a leading insider-trading expert. “The trades in question
seem at best highly unethical and at worst they may be illegal,”
Taylor said. “I would caution any and all executives from engaging
in the behavior described here. There's significant legal jeopardy if
that behavior was brought to the attention of regulators.”

Harry Sloan did not make his name in the health care industry. He came
to prominence in Hollywood.

But in 2017 Sloan made a sizable bet on Juno Therapeutics, a
Seattle-based biopharma company focused on cancer treatments.

Sloan had never personally invested in Juno before. There’s also no
sign in his tax records, which span the years 1999 to 2019, that he
purchased options to invest in other companies.

But on Dec. 14 and 15, 2017, he did both for the first time in
ProPublica’s tax data. He bought more than a quarter-million dollars
of Juno call options, a contract giving him the right to buy the stock
at a specific price. The options were “out of the money,” meaning
the price was well over what the stock was trading at at the time. The
bet would pay off only if Juno stock jumped significantly.

Options, especially out-of-the-money options like the ones Sloan
bought, are risky but can carry huge rewards. You can win big if the
stock price rises above the purchase price set by the contract. If
Amazon stock sells for $125 a share, an option to buy a share at $130
is worthless at the expiration date unless the market price jumps
above $130. If Amazon stays at $125, you’ve spent money for nothing.
But if it soars to $175 a share, you stand to make a lot from a small
investment.

Sloan’s timing proved prescient. The public didn’t know it yet,
but December 2017 was a hugely significant moment in Juno’s history.
The company had been privately negotiating to sell itself to Celgene,
a leader in the field of cancer treatments. On the same days that
Sloan bought his options, Celgene significantly raised its offer and
Juno agreed to be taken over.

When The Wall Street Journal broke the news of the imminent
acquisition a month later, Juno’s share price skyrocketed from $46 a
share to $69, its largest one-day increase ever, and Sloan quickly
cashed in. He sold much of his first tranche of options for $677,000.
In two decades of records, it was the largest sale he’d made in a
security of a company where he hadn’t been an insider.

In all, he claimed more than $1.1 million in profit from his Juno
trades, a 450% return on the cost of his options.

Of the 251 trading days in 2017, there were only a dozen other days
where Sloan could have purchased options and seen the stock’s price
increase as much as it ultimately did over the short period he held
the bulk of his position.

Through a spokesperson, Sloan, who has been a prominent fundraiser for
presidential candidates on both sides of the aisle, declined to answer
questions from ProPublica, instead providing a brief statement: “Any
insinuation of unethical or improper activity here is false, and
contrary to the reputation Mr. Sloan has developed over the course of
his lifetime.”

ProPublica provided an anonymized description of Sloan’s trades to a
former SEC commissioner, two former SEC attorneys and two leading
insider trading academics. All five said this sort of fact pattern
could draw scrutiny from regulators because of how well-timed the
trades were, and how anomalous compared to Sloan’s trades before and
after.

"If you see out-of-the-money call options, no prior history of trading
in that name, excellent timing and a large profit, generally yes, I
would expect that to draw attention from regulators," former SEC
Commissioner Allison Herren Lee said.

A remarkably timed trade may be even more suspicious, she said, if a
trader had some sort of personal tie to the niche industry the company
is in.

Though much of his career was in Hollywood — Sloan had been an
entertainment lawyer and eventually became CEO of Metro-Goldwyn-Mayer
— he is not without his connections to biotech and the subsector
Juno was in. Sloan knew Arie Belldegrun, one of the leaders in the
field of “CAR T-cell” therapy, a novel cancer treatment in which
human cells are modified to attack cancer cells. It is the same niche
that Juno specialized in. Sloan and Belldegrun were both active in art
philanthropy, backing the same Los Angeles art museum at least as far
back as 2013; Belldegrun’s wife co-hosted a VIP screening
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in 2011 for a movie produced by Sloan’s wife. And Sloan donated
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$3.2 million to Belldegrun’s lab at UCLA in 2017
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Belldegrun was previously CEO of Kite Pharma, a Juno competitor,
before selling his company just months before Juno was acquired.
Around the time that Sloan was investing in Juno call options,
Belldegrun was starting a new CAR-T company. (Four years later, in
2021, Sloan helped take public a biological engineering firm called
Ginkgo Bioworks. One of his partners in that venture was Belldegrun.)

There is no evidence that Sloan and Belldegrun ever discussed Juno.
Belldegrun did not respond to repeated requests for comment.

Robert Stiller made his fortune off smoking paraphernalia and coffee.
He helped launch E-Z Wider, rolling papers used for joints and
cigarettes, before founding Green Mountain Coffee Roasters, the
multibillion-dollar company that helped popularize K-Cup coffee pods.
That role propelled him to business celebrity, as Forbes declared him
“entrepreneur of the year”
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2001.

After Stiller left Green Mountain, he served as chairman of the board
of AgNovos, a bone health startup. There, the board Stiller led hired
a special adviser: Stephen MacMillan, an experienced medical
technologies executive. By the end of 2013, MacMillan was named CEO of
Hologic, another medical technology company, but he stayed on at
AgNovos as a special adviser to Stiller.

Within a few months, Stiller began investing in Hologic for the first
time — and aggressively.

On 33 days between March 2014 and January 2015, he bought a total of
$9.8 million in call options in MacMillan’s company. Each was a win,
netting him a combined $29 million in profit, almost a 300% return.
Stiller’s tax records show no indication that he purchased options
in companies other than Hologic and Green Mountain from 1999 to 2019.

The rise in Hologic’s share price was driven largely by revenue
growth from its innovative line of mammogram devices, which are more
effective than standard breast scans because they provide a
three-dimensional view that helps reveal smaller tumors before
they’ve grown. The company began reporting particularly strong
growth from that product line in late April 2014, after Stiller’s
first purchases. The excitement around the product grew from there, as
the line continued to beat Wall Street’s revenue expectations and
more studies affirmed its effectiveness. The company would have
noticed orders picking up months before revenue numbers were
announced, according to an industry expert who asked not to be named
to avoid antagonizing industry contacts.

Stiller began buying call options in early March.

Reached by phone, Stiller said he invested in Hologic because he had
confidence in MacMillan, but said MacMillan never shared detailed
information about the company’s inner workings with him. “I would
ask him, ‘How are things going?’ and he’d say, ‘Good,’”
Stiller said. (MacMillan did not respond to requests for comment.)

Stiller said he thought he had purchased options in other companies
during that period as well, but couldn’t name examples. He said he
might have also bought shares of Hologic in addition to options,
though he didn’t know when.

He acknowledged that buying call options in a company run by someone
he knew, before it announced good news, “might not look good” and
said that in retrospect he might have refrained. “I always have
acted under the highest ethical shit, and I understand insider
trading, and I would never do it, and I would never ask anybody else
to do it,” Stiller said. “It’s just not in my DNA.”

Even by Stiller’s account of his discussions with MacMillan, his
trades risked running afoul of the law. ProPublica described
Stiller’s trades, without identifying him, to Chip Loewenson, a
longtime white-collar defense attorney who has handled insider trading
cases.

“What you described sounds like it could be insider trading,”
Loewenson said. “Even if you take his word for it, that all he asked
is how it’s going, and he says it’s going well, that could be
material nonpublic information.” As Loewenson described it, a
one-word answer about how a company is faring could be polite chitchat
— or it could carry meaning. “Is that something a reasonable
investor would want to know? If you think you're getting an honest
answer, yes.”

In 2018, Jim Mullen, a veteran biopharma executive who previously was
CEO of biotech powerhouse Biogen
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and chairman of the Biotechnology Innovation Organization, became
chairman of the board of Editas Medicine, a firm based in Cambridge,
Massachusetts, that uses gene editing techniques to treat rare
diseases. (Mullen stepped down earlier this month after his term
ended.) The publicly traded company collaborates with Celgene to use
its technology
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to develop cancer therapies.

Mullen’s tax records show he had unsuccessfully traded in and out of
Celgene before in relatively small amounts, but on Dec. 18, 2018, he
made his biggest purchase ever of the company’s shares: $73,000
worth, almost as much as all his other past purchases combined.

His timing was excellent.
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Celgene was at the time in secret negotiations to be acquired by
pharma giant Bristol Myers Squibb. The day before Mullen bought the
shares, Celgene had expanded the circle of people who knew about the
takeover talks. According to subsequent SEC filings, Celgene informed
an unidentified pharma company about the potential acquisition in
hopes of soliciting a higher competing bid. The action also raised the
risk that the secret talks might leak. (The company that was
approached, which would have had to be orders of magnitude bigger than
Editas to consider buying Celgene, declined to make a competing
offer.)

The next day — the same day Mullen bought shares in Celgene —
Celgene’s executive committee decided to move forward with Bristol
Myers.

Two weeks after Mullen’s purchase, the deal was announced, sending
Celgene’s shares soaring, and ultimately earning Mullen $46,000 in
profit and a return of more than 60%.

Mullen and Editas did not respond to requests for comment.

ProPublica is a nonprofit newsroom that investigates abuses of power.
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Paul Kiel [[link removed]] and Jeff
Ernsthausen [[link removed]]
contributed reporting, and Doris Burke
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Ellis Simani is a data reporter at ProPublica.

Robert Faturechi is a Pulitzer Prize-winning reporter at ProPublica.

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