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A former US Food and Drug Administration official was accused of insider trading on Wednesday by the US Securities and Exchange Commission, which said he was paid hundreds of thousands of dollars for his efforts.

The charges came two days after Gordon Johnston, the former FDA official, pleaded guilty to securities fraud and three other crimes as part of a scheme to provide information to a high-profile hedge fund about upcoming agency approvals of generic drugs, according to the US attorney in New York.

Johnston, who worked as deputy director of the FDA’s Office of Generic Drugs from 1994 to 1999 and later worked as an industry consultant, was accused of insider trading by the SEC in a lawsuit filed in federal court in New York.


Between 2005 and 2011, Johnston, 64, provided information about generic drug applications to Visium Asset Management by tapping FDA contacts. One example involved an application to sell a generic version of Sanofi’s Lovenox blood thinner. Johnston passed information to Sanjay Valvani, a manager at the fund, who traded shares of two drug makers likely to be affected by an approval and made a $24.8 million profit, the feds claimed.

During this period, Johnston also worked as vice president of regulatory sciences for the Generic Pharmaceutical Association, which also provided a perch from which to mine and maintain agency contacts. Valvani initially paid Johnston a $3,000 monthly retainer, which was later increased to $4,000 per month, and then in 2010, was boosted to $5,000 per month, according to the SEC lawsuit. Johnston never disclosed his work for the fund.


“Regardless on whose behalf Johnston said he was calling, during calls and meetings with (his FDA contact) and other Office of Generic Drugs personnel, Johnston engaged in banter about issues of concern to Valvani, such as the (Lovenox applications) in order to glean nonpublic information,” the SEC lawsuit stated. The SEC claimed his bantering was possible because of his friendship with FDA personnel.

The consulting work ended in 2011, after Valvani decided there was too much heat — federal prosecutors were increasingly pursuing insider trading cases. Valvani was also charged with securities fraud, as was a former Visium employee named Christopher Plaford who traded on  the information and was also charged with securities fraud and mismarking securities. Plaford pleaded guilty, according to the US attorney.

Insider trading appears to be a growing problem in the pharmaceutical industry as several cases have emerged. The issue has raised concerns in connection with clinical trial work, as well as deal-making and the FDA approval process, which some fear can be distorted by such activities. Also today, for instance, an employee of a small biotech was charged with securities fraud.

The FDA declined to comment on what steps the agency may be taking to ensure such episodes are not repeated.

As for Johnston, in either late 2009 or early 2010, Valvani instructed him to get information about the status of the generic Lovenox applications, according to the feds. One was being developed by Momenta Pharmaceuticals. Johnston succeeded in doing so by reaching out to an FDA contact who shared what the feds described as “highly confidential” information kept in what the agency calls Tracking Documents.

Over the next several months, the fund bought large amounts of Momenta stock and shorted Sanofi shares — a reference to buying stock and making a bet it will drop. In July 2010, the FDA approved the Momenta drug and denied a Sanofi bid to prevent the approval. Momenta stock increased nearly 100 percent, while Sanofi stock sank. Johnston also provided information about two other generic Lovenox applications, and Valvani made a $7 million profit on Watson Pharmaceutical stock. Watson, now called Actavis, was one of the other two firms developing generic versions of Lovenox.

Johnston, who lives in Olney, Md., pleaded guilty to one count of conspiracy to convert US property and defraud the United States; one count of securities fraud; one count of conspiracy to commit wire fraud; and one count of wire fraud.  The first count carries a maximum sentence of five years in prison, while the other counts each carry a maximum sentence of 20 years in prison. He also faces a $5 million fine, or twice the gross gain or loss from the crimes.

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