Insider Trading at the FDA

A scientist employed by the US Food and Drug Administration has been arrested and charged with insider trading.

Here’s the story, from Diana B. Henriques at the New York Times: U.S. Chemist Is Charged With Insider Stock Trades

A 15-year veteran of the federal Food and Drug Administration and his 25-year-old son were arrested on Tuesday and charged with systematically using confidential information about pending drug applications to reap millions in illegal trading profits since 2007.

As part of its drug-approval process, the FDA is given sensitive information by companies seeking such approval. And the status of a company’s application within the FDA’s own decision-making is itself sensitive information. Since FDA approval is essential to getting a drug to market, the announcement that a company’s drug has been granted, or denied, approval by the FDA can have a huge impact on the value of a company’s stock. And what FDA chemist Cheng Yi Liang did is to use information available only to FDA insiders to make profitable trades on the stock of companies then seeking FDA approval.

Just what was so wrong with what went on here?

In a statement announcing the case, Lanny A. Breuer, the assistant attorney general for the criminal division, said: “Cheng Yi Liang was entrusted with privileged information to perform his job of ensuring the health and safety of his fellow citizens. According to the complaint, he and his son repeatedly violated that trust to line their own pockets.”

Now Mr Breuer is clearly engaging in a bit of prosecutorial rhetoric. He’s right of course that Cheng Yi Liang was entrusted with privileged information, but there’s no obvious reason to think that his use of that information for personal gain jeopardized anyone’s health or safety. But fair enough: Mr Breuer is playing his role in an adversarial system, and that licenses a certain amount of hyperbole.

But what really is wrong with the kind of insider trading that Cheng Yi Liang engaged in? The precise worry about insider trading is the subject of some debate, and I’ve blogged about that before. (See: Ethics of Insider Trading.)

There are several ways we could get at just what was unethical about what Cheng Yi Liang did. One worry is that he profited unjustly, gaining money that he didn’t earn and had no right to. Also, in engaging in insider trading, he traded on information not accessible to others. That means that the people he traded with were at an unfair advantage, and likely lost money as a result. It also means that, subject as it was to significant information asymmetries, the market in which he traded was rendered slightly less efficient, as a whole.

There is of course another ethical worry: if chemists working for the FDA take a personal financial interest in the fate of various approvals, that could quite easily corrupt the work they do. In other words, it puts such a chemist into a conflict of interest. In a conflict of interest, what is fundamentally at stake is our trust in an individual’s judgment. If FDA scientists have a personal stake in their scientific work, then we have reason to doubt their judgment. And, worse, if the judgment of FDA scientists becomes subject to doubt, then the public ends up having a reason (though perhaps not a sufficient reason) to doubt the work of the FDA as a whole.

3 comments so far

  1. Randy Grein on

    Your reasoning is right on target! The core issues are indeed conflict of interest in assessing products and unfair advantage through inside information. Both prevent the market from working in an optimal fashion.

    I find it interesting that few people agree with the second reason (unfair advantage) when the subject is market dominance, sometimes termed monopoly power. Most markets have players that through market share influence transaction prices, sometimes heavily. Under these conditions markets are no longer efficient allocators of resources as the influencers work to set prices to maximize their own profit. The condition is not, in itself unethical although acquiring the market leverage necessary to set prices might be done through unethical means.

    I have pointed out before that very few markets are ‘free’ in the classic economic sense. Few are absolute monopolies but the economic inefficiencies are still there. I am not sure that it is possible to correct this under most conditions as existing remedies may be worse (in terms of market efficiencies) than the current condition, but we should at least drop the pretense that markets are normally free and adopt a more nuanced view that encompasses degree of influence.

    Thanks for a great blog, always interesting!

  2. Romy on

    great point of view from you..indeed I’m totally agree. I’m kind of confused with insider trading. for example in this situation. There’s this situation where you buy a share from a company lets say company A. Then after a few years you purpose your company that you been working with to take over company A. Is this consider as Insider trading?..and the take over might profitable for your company..still consider that you are unethical…just curious

    what your thought?

    thank you and have a nice day!

  3. […] Cheng Yi Liang, a chemist for the US Food and Drug Administration, has been found guilty of Insider Trading and sentenced to 5 years in prison. (I first blogged about this case back in March, when Liang was arrested.) […]


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