Securities Law - Use of Insider Information

The SEC on October 30, 2010 filed a complaint against Dr. Yves M. Benhamou in the U.S. District Court for the Southern District of New York (10-CV-8266 (DAB)) alleging that Dr. Benhamou engaged in insider trading by providing confidential non-public information to several hedge funds.

According to the Complaint, six healthcare related hedge funds sold about 6,000,000 shares of Human Genome Sciences, Inc. (“HGSI”) and at the time the portfolio manager of the hedge funds possessed material negative non-public information concerning a clinical trial of the drug Albumin Interferon Alfa 2-a (“Albuferon”, a drug to treat ashtma). Benhamou was an advisor to the portfolio manager of the hedge funds. Benhamou, a citizen and resident of France, was one of five members of the Steering Committee overseeing the Albuferon clinical trial.

According to the Complaint, in January 2008, HGSI announced that all patients who had been administered a higher dosage level of Albuferon in its clinical trial would be moved to the lower dosage level because of safety issues with the most recent clinical trial. The Complaint alleges that Benhamou learned this negative material non-public information about the drug as a member of the Clinical Steering committee which had negative implications for commercial potential and that Benhamou passed the negative information to the portfolio manager of the hedge funds before the announcement was made public. When the information became public, the market price of HGSI’s common stock fell about 44%.

The hedge funds sold about 6,000,000 shares of HGSI representing all of its holdings before the announcement and avoided a $30 million loss. The market price of the drug went down 44% after the announcement.

It is alleged that Benhamou communicated this negative information in violation of his duty as a member of the Steering Committee and that the portfolio manager of the hedge funds knew or should have known that Benhamou served on the Drugs Trial’s Steering Committee and owed a duty of confidentiality.

The SEC charged that Benhamou violated § 17(a) of the Securities Act of 1933 by (a) employing a device scheme or artifice due to fraud; (b) obtaining money or property by means of untrue statements of a material fact or omitting a material fact in order to make the statements made in the light of the circumstances under which they were made not misleading, or (c) engaging in a practice or course of business that operated or would operate as a fraud or deceit.

The SEC seeks a permanent injunction enjoining the Defendant from violating (a) § 20(e) and (b) § 21(d)(1) of the Exchange Act and (b) from violating § 17(a) of the Securities Act, and (c) § 10(b)(5) of the Exchange Act. The SEC seeks to have (a) Benhamou disgorge with prejudgment interest all illicit trading profits or losses avoided as a result of the conduct alleged in the Complaint, and (b) ordering the Defendant to pay civil penalties pursuant to Securities Act and the Exchange Act.
According to the Wall Street Journal, the Defendant was also charged criminally and was arrested in New York