On September 22, 2020, the Second Circuit of the US Court of Appeals upheld the conviction of Dr. Edward Kosinski, a cardiologist convicted of insider trading, for trading a drug company’s stock based on nonpublic inside information obtained while working on a clinical trial for that drug company. The three-judge panel held that there was sufficient evidence presented at trial to show that Kosinski breached a fiduciary duty to the drug company when he secretly traded its stock.
In 2014, Kosinski served as a principal investigator for a clinical trial of a blood clotting drug for Regado Biosciences, Inc., and secretly accumulated almost $250,000 of Regado stock, despite signing an agreement to inform Regado if his holdings ever exceeded $50,000. Kosinski sold all of his shares the day after learning that Regado suspended new patient enrollment in the trial due to several allergic reactions, before the company publicized the suspension, enabling him to avoid a loss of $160,000. Later, Kosinski purchased options betting that Regato shares would fall after learning that a patient died from an allergic reaction to the drug. Once Regado disclosed that the clinical trial was permanently halted due to severe allergic reactions, Kosinski earned approximately $3,300.
In 2017, Kosinski was convicted by a jury of two counts of insider trading in the US District Court for the District of Connecticut, and sentenced to a term of six months in prison. Kosinski appealed his convictions to the Second Circuit, alleging that he was under no duty as an independent contractor to refrain from trading based on nonpublic inside information, and arguing that the district court’s jury instruction was erroneous, causing him to suffer undue prejudice.
The Second Circuit found that Kosinski’s confidentiality agreement with Regado established a fiduciary duty as a “temporary insider” based on a relationship of trust and confidence, and his trades based on nonpublic inside information “constituted a fraud on Regado.” The panel also held that while the district court’s jury instruction may have been erroneous, the error was inconsequential because the evidence against Kosinski was so overwhelming that the panel was convinced that a rational jury would have found him guilty absent the error.