Grassley Seeks Probe on Financial Firms’ Paying for Research Disclosures
Senate Finance Committee Chair Chuck Grassley (R-Iowa) on Monday sent a letter to U.S. Attorney General Alberto Gonzales urging the Department of Justice to investigate whether doctors participating in clinical trials are selling confidential information to stock analysts and investors, the New York Times reports. Grassley also sent the letter to Securities and Exchange Commission Chair Christopher Cox, whose agency already is examining possible insider trading involving the approval of prescription drugs.
Grassley's call for action comes after the Seattle Times on Sunday published a four-part series about financial firms paying scientists to reveal details of medical research on new drugs before the results are officially announced by pharmaceutical companies (Anderson, New York Times, 8/9).
Summaries of the articles appear below:
- "Drug Researchers Leak Secrets to Wall Street": Although doctors conducting clinical trials on experimental drugs are "sworn to keep their research secret" until pharmaceutical companies disclose the final results, "elite Wall Street firms -- looking to make quick profits -- have found a way to harvest these secrets: They pay doctors to divulge the details early," the Seattle Times reports. A Seattle Times investigation found "at least 26 cases in which doctors have leaked confidential and critical details of their ongoing drug research to Wall Street firms." The Seattle Times reports that "[u]ntil now, the selling of drug secrets has been hidden from securities regulators and the public, but biotech and Wall Street insiders say the practice is widespread." The practice is being driven by hedge funds -- "the largely unregulated investment pools that cater to the super-rich" -- and is facilitated by firms known as "matchmakers," according to the Seattle Times. To gather information on drug trials, "elite investors pay up to $1 million a year" to matchmakers, which "pair Wall Street firms with doctors involved in ongoing drug research," the Seattle Times reports. Matchmakers pay the scientists $300 to $500 per hour to speak with the investors. According to legal experts interviewed by the Seattle Times, "[t]rading stock based on secret information bought from medical researchers is illegal." A U.S. Supreme Court decision in 1983 found that analysts are free to gather information about companies and pass it on to their clients but added that analysts are not allowed to persuade someone to divulge company secrets, saying that practice is "misappropriating" nonpublic information, according to the Seattle Times (Timmerman/Heath, Seattle Times, 8/7).
- "Some Doctors See Ethical Pitfall in Actions That Others Defend": Although legal and medical experts say that discussing ongoing medical research with third parties is a violation of confidentiality contracts, some doctors "downplay[ed] the significance" of the information they reveal to investment firms, the Seattle Times reports. Some doctors who spoke with the Seattle Times said that they only discuss information that already is publicly known, and others said that the confidential information they discuss is not very useful. Corey Langer, a lung cancer expert at Fox Chase Cancer Center in Philadelphia, said he believes he has complied with confidentiality rules because he has disclosed personal impressions of ongoing research rather than full testing results. According to the Journal of the American Medical Association, the number of doctors who accept money from Wall Street firms has risen from fewer than 1,000 a decade ago to about 75,000 (Heath/Timmerman, Seattle Times, 8/7).
- "Selling Secrets Can Distort Data, Kill Promising Drugs": Wall Street interaction with medical researchers in the "worst case" can compromise clinical trials, according to some doctors and pharmaceutical company executives, the Seattle Times reports. A physician who heard from a Wall Street analyst that a drug was doing well in a study "might be tempted to select healthier patients with a better chance of benefiting from the study," an occurrence that would distort the study's findings, the Seattle Times reports. Drummond Rennie, deputy editor for JAMA, said, "When the data leaks out, it wrecks the trial" (Timmerman, Seattle Times, 8/7).
- "Sellers, Buyers of Secrets Risk Being Prosecuted": Doctors who sell confidential company information, as well as anyone who buys the information, are subject to federal insider-trading laws and could be prosecuted by SEC, the Seattle Times reports. In addition, if the violation is intentional, DOJ could prosecute, according to former SEC enforcement officer Thomas Newkirk. State attorneys general also can bring charges under state securities laws, and drug companies could sue doctors for breaking their confidentiality agreements, although "this happens rarely," the Seattle Times reports (Heath, Seattle Times, 8/7).
In his letter to Gonzales and Cox, Grassley asked that DOJ and SEC conduct "a complete and thorough review of these findings and allegations." Grassley wrote, "Selling drug secrets violates a trust that is fundamental to the integrity of both scientific research and our financial markets." He added, "[P]lease advise on whether or not Congress needs to consider strengthening any laws in light of these reports" (CQ HealthBeat, 8/8).
The Seattle Times special report should give SEC's ongoing investigation added momentum, according to two people briefed on Grassley's inquiry, the New York Times reports. However, regulators must "weed through a number of complex issues determining whether securities laws have been breached," and their job will be "challenging," according to the New York Times.
To successfully bring charges of insider trading against doctors, SEC would have to prove that the released information was material, meaning that it alters public information in such a way that it could lead a trader to buy or sell a company's stock. SEC also must prove that the information was nonpublic and that doctors breached their confidentiality agreements. In addition, SEC will have to determine whether doctors' confidentiality agreements apply to their patients, the companies for which they are conducting research or both (New York Times, 8/9).
Gerson Lehrman Group -- a New York firm that according to the Seattle Times has 60,000 doctors available to speak with its clients -- in a written response to the Seattle Times report said, "Before participating in our network, all physicians and scientists sign a contract that explicitly states they must not violate any of their confidentiality agreements." The statement added that doctors are paid even if they end a discussion because it involves a subject matter that is confidential.
Duncan Smith, spokesperson for Citigroup Smith Barney, said, "We neither want nor seek access to information that is not legally in the public domain."
Debra Charlesworth, a spokesperson for Genentech -- which was one of the companies mentioned in the Seattle Times article -- said it was too early to determine whether the company would take action against 20 doctors who reportedly discussed a clinical trial with Citigroup Smith Barney.
SEC spokesperson John Heine said the agency had no comment on whether communications between researchers and investment firms violated insider trading rules.
Arthur Caplan, director of the Center for Bioethics at the University of Pennsylvania, said, "If that ain't insider trading, I don't know what is." Caplan added that if company executives do not dismiss researchers who release confidential information, they "could be going to jail or paying some pretty hefty fines."
Lisa Bero, chair of the committee on conflicts of interest at the University of California-San Francisco, said, "It's just outrageous behavior. I can't imagine any university committee thinking it was ethical" (Tansey, San Francisco Chronicle, 8/9).
APM's "Marketplace" on Monday discussed Grassley's investigation request with David Heath, reporter for the Seattle Times (Ryssdal, "Marketplace," APM, 8/8). The complete segment is available online in RealPlayer.This is part of the California Healthline Daily Edition, a summary of health policy coverage from major news organizations. Sign up for an email subscription.