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'Cautionary tale' shows risk of prosecution
On April 14, 2011, James Fan stood on the landing of a parking garage at Newark Liberty International Airport, a cheer-up letter from his young son in his pants pocket, the prospect of a four-story leap facing him.
Fan, 39, had been charged a day earlier with insider trading based on his knowledge of Seattle Genetics Inc., a health-care company where he was manager of clinical programming. Also charged: his younger brother, Zishen, who was scheduled to take the oath of U.S. citizenship a month later.
The total take, a judge later determined, was about $200,000. James Fan was trying to help his brother, who had found himself deep under water after the California real estate market collapsed in 2008, prosecutors said later.
"The Fan case is such a cautionary tale," said Jenny Durkan, the U.S. attorney in Seattle. "Both brothers were promising."
Health care especially prone
The markets are awash in insider trading, and the health-care industry has been hit particularly hard. Health-care businesses offer illegal traders more opportunities to profit than the finance and technology sectors that traditionally have been prime victims of insiders who leaked confidential data about earnings or deals.
Health companies can live or die on the results of drug trials, which stretch for years before regulators make decisions that can trigger hundreds of millions of dollars in profits or losses. The industry has undergone significant consolidation, leading to several multibillion-dollar mergers.
The lineup of accused health-industry insider traders illustrates how widespread the illegal practice has become: chief executive officers, hedge-fund traders, bankers, lawyers, doctors, accountants, a retired Delta Air Lines pilot, a film producer and a member of Major League Baseball's Hall of Fame have been charged or sued by regulators. It has touched the Food and Drug Administration and large health-care companies such as Bristol-Myers Squibb and Abbott Laboratories.
"Health care is particularly attractive to criminals, because so much turns on the government regulatory approval," said Rod Rosenstein, the U.S. attorney for Maryland, whose office helped prosecute the FDA case. "If you have a pending application for a new drug, the difference between yes and no on approvals can be tens or hundreds of millions of dollars."
The Fans are among at least 75 people sued by the SEC or charged since 2008 with passing or receiving insider-trading tips involving pharmaceutical, biotechnology or other health-care stocks. While the number of insider-trading cases in the technology industry has been roughly the same during that time, many of those were intertwined with the case of Raj Rajaratnam, the billionaire hedge-fund manager serving an 11-year prison sentence.
What's notable about health-care corruption is its breadth. It's a part of what could be termed the democratization of insider trading. While once it seemed to be the domain of big players like arbitrager Ivan Boesky and personified by the character Gordon Gekko in the movie Wall Street, insider trading is often conducted by everyday, otherwise law-abiding people looking to make thousands, not millions, of dollars.
Among the cases: husbands stealing information from wives, fraternity brothers conspiring and a 62-year-old attorney, Dean Goetz, making trades on information he overheard from his daughter. She was a lawyer visiting home for the holidays while she worked on the Abbott acquisition of Advanced Medical Optics. Goetz, who was sued by the SEC, settled without admitting or denying wrongdoing.
"The biotech industry is particularly vulnerable to insider trading schemes because a successful or unsuccessful clinical trial can cause such sharp market movements," said Durkan, Seattle's top federal prosecutor. "The health-care sector of the hedge-fund industry is a very small world where people work closely on ideas."
That's what one health-care inside trader turned confidential informant told the FBI in an agent's interview summary obtained by Bloomberg News.
The same informant, in another interview, said he was once on a golf course with three doctors whose beepers all went off at the same moment with the same inside tip.
The health-care cases
An FDA chemist, Cheng Yi Liang, had access to the agency's internal tracking system for new drug applications and could tell which would succeed or fail. He pleaded guilty to trading on more than 25 companies over almost five years, admitting he made profit or avoided losses of $3.78 million. He is serving five years in prison.
Eddie Murray, the hall of famer, was sued by the U.S. Securities and Exchange Commission, which alleged his former Baltimore Orioles teammate Doug DeCinces tipped him about the acquisition of Advanced Medical Optics in 2009. The agency said DeCinces heard from former CEO James V. Mazzo, a close friend and neighbor, that Abbott Park, Ill.-based Abbott would buy the company. Murray, DeCinces and two other men paid $3.3 million to settle without admitting liability. Mazzo and another defendant denied any wrongdoing. Their case is pending.
Business consultant Brett A. Cohen and his uncle David V. Myers were charged with insider trading in 2009 on two biotechnology companies. Cohen received and sent emails, including to a fraternity brother, using coded words that referred to the movie Wall Street, such as "blue horseshoe." Cohen and Myers pleaded guilty and received three years' probation.
The fund-manager cases
Former hedge fund manager Stephen R. Goldfield settled an SEC lawsuit claiming he made $14 million by trading on inside information before the 2007 takeover of MedImmune by AstraZeneca. The SEC claimed former Merck & Co. executive James W. Self Jr. tipped Goldfield after learning on his job that MedImmune was for sale. Self also settled. Neither man admitted wrongdoing.
Robert Ramnarine was a Bristol-Myers executive who performed due diligence on three companies targeted for acquisition. U.S. prosecutors in New Jersey charged him with making $311,361 by buying stock options in the companies. His lawyer is negotiating a plea agreement, court papers show.
Former investment banker Igor Poteroba, who worked in UBS AG's health-care group, pleaded guilty to tipping a friend about pending acquisitions. Poteroba, who admitted to a conspiracy spanning five years, got 22 months in prison.
Aftermath of destruction
The Fan story illustrates how health-care insiders abuse privileged information for profit, while the aftermath of investigations can destroy people and careers. It also shows how regulators and prosecutorsand, in this case, an online brokerageacted on red flags.
James Fan was born in 1971 in Beijing, a year before his brother, Zishen. Their parents later divorced.
Zishen Fan admired his brother James, said Allen Ressler, a Seattle attorney who represented Zishen Fan.
"It's a traditional Chinese family," Ressler said. "He looked up to his older brother, and his older brother was like a father figure to him. He relied on his counsel, much to his chagrin in this case."
After high school, Zishen Fan attended college in Beijing and went to the U.S. with his wife in 1998. He earned a Master of Business Administration at American Graduate School of International Management, now known as Thunderbird School of Global Management, based in Glendale, Ariz.
In 2001, he applied for political asylum in the U.S. as a practitioner of Falun Gong, according to court papers filed by prosecutors. Falun Gong is a spiritual discipline that was subject to Chinese government repression. The U.S. granted that petition in 2005.
Zishen Fan moved around the U.S., working as a sales representative for Whitehouse Station, N.J.-based Merck in San Francisco and Eli Lilly & Co. in Philadelphia. He moved to California in 2005, working in sales for Becton, Dickinson & Co., Roche Holding and Insulet Corp., Ressler said.
Zishen was divorced in 2008 after 10 years of marriage; he and his wife had no children. He was earning about $96,000 a year at the time for Insulet, according to divorce records. Those records stated that he owed $1.05 million on two properties worth $950,000. Zishen's real estate loans of $520,000 and $400,000 went into foreclosure, along with a home equity loan of $75,000, according to a government court filing.
James Fan (born Zizhong Fan) and his wife trained as physicians in China, where the pay was low, said James Fan's attorney in Los Angeles, Adam Braun, a former federal prosecutor. He never practiced medicine and moved to the U.S. in 1999, a year after his brother.
"When he came to the U.S., he wasn't able to practice medicine, so he went into medical research," Braun said.
James Fan worked for several years at MedImmune in Maryland. He moved to Seattle to improve the respiratory health of his two young sons, who both have severe asthma, Braun said.
"James was a quiet, sort of shy and more passive person than his brother," Braun said. "His brother is very charismatic and assertive. He's a lot more social and Americanized."
In July 2008, James Fan began work at Seattle Genetics in Bothell, Wash., as a senior statistical programmer. His job was to convert raw data from clinical trials into statistics measuring testing on drugs.
By 2010, he made about $110,000 a year and led a group of programmers who analyzed the data from a pair of clinical trials on the company's flagship drug, SGN-35. The results would underpin the company's FDA application for its first marketed product.
Seattle Genetics developed the drug with Takeda Pharmaceutical Co. of Osaka, Japan. Seattle Genetics would handle marketing in the U.S. and Canada while Takeda had the other worldwide rights.
The drug, also known as brentuximab vedotin, uses an antibody to bind with a protein on the surface of lymphoma cells, then blasts them with a cancer-killing chemical. It avoids the side effects of chemotherapy by unleashing the cell-killing agent only when it reaches the tumor, avoiding release in the bloodstream or to healthy tissue.
In 2010, the company ran one clinical trial involving 102 patients for whom prior therapy didn't work and another with 58 patients. The trials would be a success, the company said, if 20 percent of patients showed complete or partial remission of their disease. James Fan learned in July 2010 that the raw data showed progress for a large majority of the patients.
Because of the trials, Seattle Genetics began a blackout period on employees trading company securities starting June 22. A day earlier, James Fan cashed $50,800 in certificates of deposit and put it in his personal bank account, according to a Federal Bureau of Investigation complaint. On June 30, he wired $50,000 from his online brokerage account to his bank account.
Nine days later, James Fan wired $100,000 to an account in China in the name of his mother, according to the FBI complaint. Fan moved that money to an online TD Ameritrade Holding Corp. account in the name of his father in China. James Fan intended that money as a loan for Zishen, who also moved money into the account, according to Braun.
On Aug. 24, Zishen Fan began buying options to purchase shares of Seattle Genetics at $12.50 per share by Oct. 16. Those options purchases, in the account in his father's name, continued until Sept. 24, when he added 12,650 shares. Over a month, the brothers spent $514,314 on stock and options purchases of Seattle Genetics.
On Monday, Sept. 27, Seattle Genetics announced that SGN-35 cut tumor size by at least half for 75 percent of the 102-patient group. Shares closed at $14.30, a rise of almost 18 percent.
Zishen Fan began exercising the options and selling shares.
The activity aroused suspicions at Omaha, Neb.-based TD Ameritrade, which filed a complaint about possible insider trading on Oct. 27 with the SEC and the Financial Crimes Enforcement Network, a U.S. Treasury Department bureau that fights money laundering.
"TD Ameritrade utilizes a variety of risk-management tools and surveillance methodologies to identify potentially problematic activity," Kristin Petrick, a company spokeswoman, said via email. "We do so to help protect our clients and comply with relevant laws and regulations. It is our policy to not comment on the specifics of these methods."
The Options Regulatory Surveillance Authority (ORSA), which monitors trading for the Chicago Board Options Exchange and other exchanges, also flagged the account and alerted the SEC on Dec. 13.
ORSA found that on 11 days, Fan's buys ranged from 40 percent to 92 percent of all such contracts.
SEC lawyers in San Francisco, who also cover Seattle, took up the case. They called the Fan brothers within minutes of each other on Jan. 13, 2011. SEC attorney Jennifer Lee told Zishen Fan that she was taping the call. Fan confirmed he was also known as Brandon.
"How did you become familiar with Seattle Genetics?" Lee asked.
"Web search," Fan said. "I'm interested in, you know, medical biotech pharmaceuticals."
"O.K.," Lee said. "And do you know anyone who has worked at Seattle Genetics?"
"No," Fan said.
Minutes later, James Fan interrupted his own call with the SEC lawyers and said he would call right back. Over the next two hours, the brothers talked four times by phone. When James Fan spoke again to the SEC, he denied knowing or being related to Zishen Fan. He refused to give the names of his parents. When asked about SGN-35, he ended the call.
Later that day, Zishen transferred $50,000 from his father's brokerage account to a bank account in his father's name. The next day, Zishen tried to wire $500,000 from the brokerage account to an account in China, telling TD Ameritrade it was for "purchasing retirement property."
TD Ameritrade refused the request "due to a lack of signed authorization for purposes of foreign transfers," according to the FBI complaint.
James Fan told his boss at Seattle Genetics he was "leaving for China that day and would not return to work for at least four weeks and potentially longer," citing "an urgent family emergency," according to a statement of company General Counsel Kirk D. Schumacher filed in court by the SEC.
Fan went to Vancouver and flew from there to China. A week later, he returned to Seattle on a flight from Beijing.
On Jan. 19, the SEC sued, filing a complaint that laid out the insider-trading scheme. The agency said they made profits of $803,000 and sought to freeze the Fans' assets. The agency cited the Fans' lies to the SEC and attempts to move money to China. It included hundreds of pages of documents, such as trading records from TD Ameritrade.
A federal judge in Seattle froze the account that day.
James Fan never returned to Seattle Genetics, which later terminated him, Braun said.
As a legal permanent resident with a green card, James Fan was concerned a criminal investigation and conviction would lead to his deportation, Braun said. Fan said he feared separation from his two young sons, both U.S. citizens, the lawyer said. They were ages 3 and 7 at the time.
Braun said he and Zishen Fan's lawyer met on Feb. 16 with a federal prosecutor, an FBI agent and an SEC attorney to try to persuade them to punish the Fans through the regulatory lawsuit and not by criminal prosecution. The defense lawyers offered explanations for the evidence.
"We laid out some facts that would tend to suggest the case was not as clean as they thought," Braun said.
Braun said that in their phone calls the brothers may have discussed what was already in the public domain about Seattle Genetics, suggesting they didn't act on inside information. Zishen Fan could have made educated purchases based on the mix of information in the public. He also had previously traded in pharmaceutical stocks, Braun said. The lies to the SEC attorneys at the start of the probe were problematic, Braun conceded.
"They were nervous, and they lied," Braun said. "We obviously had to try to explain that away. They were in a precarious immigration situation, and they were scared. We took the position that James didn't know that his brother was trading."
At the meeting, Braun stressed to the prosecutors the importance of Fan's children to him, he said.
"He couldn't face not being a part of his kids' lives," Braun said he told the government.
Braun also argued that Fan could be trusted to surrender because he returned from China even as he knew about the SEC lawsuit and the criminal investigation.
As prosecutors built their case, James Fan was unable to find work in Seattle. He landed a job as an analyst and statistical programmer with Novartis AG (NOVN) in New Jersey. He worked there for about two weeks, staying in a hotel and flying home on weekends, Braun said.
Braun said he asked prosecutors to let Fan surrender to the FBI, if he was charged, rather than undergo arrest in front of his wife and children. His requests were in vain.
On April 13, prosecutors filed a criminal complaint in federal court in Seattle. The Fans' charges constituted the first criminal insider-trading case for federal prosecutors in western Washington. The next morning, FBI agents went to arrest Fan at his rental home in Mill Creek, Wash. They didn't know Fan was working in New Jersey.
Fan's distraught wife called Braun, who phoned a prosecutor at about 7 a.m. to complain. Braun said agents should have let Fan surrender rather than arrest him. Braun promised to bring his client to court the next day for his initial appearance and bail hearing. Braun spoke with Fan at his job.
"He was scared," Braun said. "He said, 'Should I go back to the hotel or not? Will I be arrested there? Should I just leave my stuff and come home?' I said, 'Chances are they're not going to be looking for you there, at least not immediately.'"
Braun talked to Fan several times that day, discussing trial strategy, the hiring of experts and the court hearing. Fan told Braun he would reserve a flight out of Newark. Fan went to the airport without making a flight reservation for that day.
He spoke that afternoon with a high school friend from China who lived in New Jersey. The friend grew alarmed and went to the airport to find Fan, Braun said. The friend then contacted police from the Port Authority of New York and New Jersey, which runs the airport, and said Fan was suicidal and at a parking garage.
When police arrived, they found Fan's body beside the garage. They determined he jumped from a fourth-floor landing, said Port Authority spokesman Al Della Fave. They also found his rental car in the garage. He was pronounced dead at a local hospital.
"Until the very last minute, he was probably deciding whether to fly," Braun said. "In the end, he had a letter from one of his boys in his pocket and a picture of his wife. They had sent him a letter when he was in New Jersey to kind of perk him up."
Durkan, the U.S. attorney in Seattle, said the government acted correctly in filing charges and seeking to arrest Fan rather than let him surrender.
"There is always uncertainty in litigation, but this was a very strong case," Durkan said. "We have no doubt the jury would have reached the right conclusion."
Durkan said prosecutors considered the consequences of Fan's immigration status. They also concluded he couldn't be trusted to surrender, she said.
"We had several indications that he was a flight risk," Durkan said. "He had already gone to China through Canada. He tried to move money offshore. He had ties to China. He moved, and we had been given no indication."
Durkan said that, while she regrets the suicide, the decision to arrest him was correct.
"Nobody wanted that outcome," Durkan said. "But at the end of the day, there is only one person who is responsible for that outcome, and that's Mr. Fan."
The day after the suicide, Zishen Fan appeared in court.
"He was overwhelmed," Ressler said.
Zishen Fan, a permanent legal resident, was at the end of a years-long process seeking U.S. citizenship. He needed only to undergo the oath of citizenship ceremony. On May 16, 2011, the U.S. Citizenship and Immigration Services notified Fan by mail that his oath ceremony, set for May 26, had been "descheduled" because of "unforeseen circumstances."
Fan pleaded guilty on July 12, 2011, admitting his brother gave him material, nonpublic information about SGN-35. Fan admitted buying stock and options in the TD Ameritrade account in his father's name.
Before sentencing, Ressler told the judge that James Fan bore more blame, saying he provided "the bulk of the funds used for insider trading" and was "obviously the only person" who could know inside information at Seattle Genetics.
Zishen Fan followed the lead of his brother, whom he "admired all of his life," Ressler said in a sentencing memo. "He admits that he should have realized that what his brother was asking him to do was criminal and regrets that he allowed himself to be used and that he became involved."
The case and suicide put "an incredible strain" on Fan, Ressler wrote. "Zishen, as his tradition dictates, has taken on the responsibility of providing financial and emotional support" to his widowed sister-in-law and her children, and to his parents in China.
In a letter to the court, James Fan's widow, Yuan Ma, said her husband's death "has brought excruciating pain to me and my two children. While on the edge of collapsing and emotionally traumatized, I am struggling with my work, my emotions and taking care of the kids all by myself."
Braun said James Fan never profited from the trades.
"If anything, James would have done this to help his brother out financially, given the brother's financial troubles," Braun said. "There's no allegation that James profited directly or indirectly from the trades. When the money was returned to James, it was just in the amount he loaned."
That assertion isn't part of the court record.
In calculating the money made by the brothers, the government's expert fixed that gain at $207,316, while a defense expert put it at $110,636. Both the SEC and federal prosecutors initially said it was $803,000.
In a memo to the judge, prosecutors sought a two-year prison term, saying Fan "willingly encouraged and exploited his brother's position with Seattle Genetics" to solve his own financial difficulties.
Prosecutors also disputed Fan's claim that he was a minor player, saying he had a "greater and clearer motive" than his brother, and he made all the trades in the TD Ameritrade account he controlled.
U.S. District Judge Marsha Pechman agreed with the government's expert on the gain, saying Fan made $207,316. She sentenced Fan on Oct. 7, 2011, to 18 months in prison. He is serving his term at a facility in Taft, California, about 120 miles northwest of Los Angeles.
Fan declined an interview request.
Ressler said he has spoken with Fan in prison.
"He says he's enduring it," Ressler said.