Last week, the SEC and DOJ both brought insider trading cases against a chemist employed by the U.S. Food and Drug Administration (FDA). The chemist, Cheng Yi Liang, allegedly used information he learned at the FDA about upcoming announcements of FDA drug approval decisions as the basis for insider trading that generated more than $3.6 million in illegal profits and avoided losses. The SEC claims Liang illegally traded in advance of at least 27 public announcements about FDA drug approval decisions involving 19 publicly traded companies.

For example, a company called Clinical Data applied to the FDA for approval of a drug called Viibryd. Liang allegedly accessed a confidential FDA database that contained critical information about the FDA's review of Clinical Data's application, and relied on that information to purchase more than $700,000 worth of Clinical Data's shares. The SEC alleges that after the FDA issued a press release approving Viibryd. Clinical Data's stock price immediately rose by more than 67 percent, giving Liang a $380,000 profit.

Commenting on the case, Dan Hawke, Chief of the SEC's Market Abuse Unit, stated that:

The insider trading laws apply to employees of the federal government just as they do to Wall Street traders, corporate insiders, or hedge fund executives. Many government agencies like the FDA routinely possess and generate confidential market-moving information. Federal employees who misappropriate such information to engage in insider trading risk exposing themselves to potential civil and criminal charges for violating the federal securities laws.

Commentators such as Professor Bainbridge have observed that this type of case against a government employee is extremely rare, and I believe that is correct. It is actually a bit surprising to me that such cases do not occur more often. After all, there are many federal and state employees that have access to market-moving information on a daily basis, such as:

FDA employees (Duh);

Patent and Trademark Office employees (access to nonpublic information about patent applications)

SEC, DOJ and FBI employees (access to nonpublic information about ongoing investigations that may affect a company's stock negatively when they become public);

Federal and state judges, law clerks and administrators (access to nonpublic information about the outcome of cases. In fact, traders will sometimes have people sit in a courtroom during a trial so that they can race out and call them with the verdict in material litigation so that an early trade can be made);

Federal Reserve employees (access to nonpublic information about interest rate changes);

and so on....

Given that big firm lawyers, investment bankers, and Big 4 accountants who routinely possess inside information are commonly prosecuted and sued for insider trading, it is refreshing to realize that "government employee" cases are far more rare.

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