First Circuit affirms insider trading convictions

On November 20, 2020, the US Court of Appeals for the First Circuit affirmed the insider trading conviction of two biostatisticians formerly employed by separate publicly traded pharmaceutical companies.

The facts, as detailed by the Court of Appeals, reveal that Schultz Chan, one of the defendants, was hired by Akebia Therapeutics, Inc. in August 2015, two days after a stock trading blackout period took effect for employees, as the company was completing clinical trials on a treatment it had developed, and was preparing to release the preliminary results.  The second defendant, Songjiang Wang, began working for Merrimack Pharmaceuticals, Inc. in 2011; throughout the study of a pancreatic cancer treatment by Merrimack in 2013 and 2014, Wang led the company’s statistical programming group.

In 2017, following an investigation by the Financial Industry Regulatory Authority, Chan and Wang were charged with conspiracy to commit securities fraud in violation of 18 USC § 371, and three counts of securities fraud for trading on the stock of Akebia and Merrimack based on material non-public information, in violation of 15 USC § 78j(b), and Rule 10b-5 thereunder, 17 CFR § 240.10b-5.

At trial in the US District Court for the District of Massachusetts, the jury determined that the defendants, who were friends and former work colleagues, had shared with one another material non-public information obtained in the course of their respective employment, and that each had made profitable trades based on the shared information.  Both defendants were found guilty on all four counts.  The court sentenced Chan to thirty-six months in prison, and ordered him to pay restitution to Akebia in the amount of $153,428.  Wang was sentenced to six months in prison and was required to pay restitution (also to Akebia) of $17,047.

On appeal, Chan and Wang challenged their convictions on several grounds, all of which were rejected by the court.  The court held that:

  • The variance between the facts adduced at trial and those presented in the superseding indictment did not alter the statutory conspiracy violation and were not prejudicial to the defendants;
  • There was sufficient evidence to support conviction on both the classical theory of insider trading – when a corporate insider trades on his own company’s securities based on material non-public information – and the misappropriation theory – in which a person misappropriates confidential information, in breach of a duty owed to the source of the information, and;
  • The district court’s conclusion that the prosecution’s refusal to give the defendants a referral letter sent by FINRA to the SEC (although the attachments to the letter were produced) was immaterial to the preparation of the defense must stand, as the defendants have not shown that the decision constituted an abuse of discretion.

The court also denied Chan’s appeal of the basis used for calculation of his sentence, and both defendants’  challenge to the amount of restitution ordered pursuant to the Mandatory Victims Restitution Act, 18 USC § 3663A.

Opinion 

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