Researcher, doctors fined in insider trading case Fellow tipped off friends about failed Alpha-1 drug

Regulation

September 26, 1998|By Mark Guidera | Mark Guidera,SUN STAFF

The Securities and Exchange Commission said yesterday that a federal judge has ordered four California doctors and a Michigan researcher to turn over illegal profits and pay fines, totaling more than $300,000, in an insider trading case involving a Maryland biotechnology company.

Judge Gary L. Taylor, of the U.S. District Court for the Central District of California, found that Wayne State University fellow Rangarao Panguluri tipped off doctors he was friends with in April 1994 that laboratory tests of an anti-hepatitis drug being developed by Bethesda-based Alpha-1 Biomedicals Inc. showed the drug had performed no better than a placebo.

Panguluri was working with a Wayne State University doctor who was studying the drug for Alpha-1, the SEC said.

The results made it unlikely that Alpha-1 could win Food and Drug Administration approval, a key step needed for the drug to be marketed commercially.

The SEC said in a civil complaint filed against Panguluri and the doctors who the researcher tipped off, Dr. Ravinda Alapati, Dr. Syam Gaddam and his wife, Gawatami Gaddam of Anaheim, Calif., about the poor test results. The SEC alleged that Panguluri was friends with Alapati and the Gaddams and was hoping to be employed at their medical practice.

The SEC alleged that Alapati and the Gaddams immediately sold their shares in Alpha-1 and SciClone Pharmaceuticals Inc. of San Mateo, Calif. SciClone held foreign marketing rights to the experimental drug.

The SEC alleged that Alapati also sold short 2,000 shares of Alpha-1 on April 25, 1994, and April 26, 1994, and is alleged to have tipped off a friend, Dr. Ravi Markham, who then sold his Alpha-1 shares.

The doctors sold their shares before the outcome of the clinical trial was made public April 28, 1994, the SEC said. The shares of Alpha-1 and SciClone declined that day by more than 60 percent, the SEC said.

"The lesson of this case is pretty simple," said Peter H. Bresnan, assistant chief litigation counsel for the SEC division of enforcement. "If you engage in insider trading based on nonpublic information about laboratory or clinical results, we'll find you, prosecute you and the penalties will be severe."

The SEC said that Panguluri was ordered to pay a $75,000 fine.

Alapati, the Gaddams and Markham were ordered to turn over their profits from the stock sales plus interest to the SEC. The profits ranged from $16,931 to $61,000. They also were ordered to pay fines equal to their profits, the SEC said.

Panguluri, Alapati, the Gaddams and Markham consented to the judgments without admitting or denying guilt, the SEC said.

Dr. Milton Mutchnick, a Wayne State researcher who led the drug study, was charged with tipping off six people about the study results. In April 1997, he agreed to settle the SEC charges without admitting or denying guilt. As part of the settlement, he paid a civil penalty of $163,494, the SEC said.

Alpha-1 ceased operations last year after it ran out of money.

Pub Date: 9/26/98

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