Former FDA Chemist Sentenced to Prison in FDA Insider Trading Case

Failed to Disclose Almost $4 Million in Illicit Profits on FDA Financial Forms

March 5, 2012

Greenbelt, Maryland - Chief U.S. District Judge Deborah K. Chasanow sentenced former Food and Drug Administration (FDA) chemist, Cheng Yi Liang, age 58, of Gaithersburg, Maryland, today to five years in prison, followed by three years of supervised release, for securities fraud and making false statements related to a $3.7 million insider trading scheme that spanned nearly five years. Liang was previously ordered to forfeit $3.7 million representing the proceeds of the insider trading scheme.

The sentence was announced by U.S. Attorney for the District of Maryland Rod J. Rosenstein; Assistant Attorney General Lanny A. Breuer of the Justice Department’s Criminal Division; James W. McJunkin, Assistant Director in Charge of the FBI’s Washington Field Office; and Elton Malone, Special Agent in Charge of the Department of Health and Human Services, Office of the Inspector General (HHS-OIG), Office of Investigations, Special Investigations Branch.

“Cheng Yi Liang bought and sold stocks based on non-public information, and he tried to conceal his crimes by using the names of friends and relatives,” said U.S. Attorney Rod J. Rosenstein. “Mr. Liang violated his duty of loyalty to the FDA and profited from inside information.”

“Taking advantage of his special access as a chemist at the FDA, Mr. Liang used sensitive inside information to reap illegal profits in the pharmaceutical securities market,” said Assistant Attorney General Breuer. “For years, he exploited his position in the agency to make easy money on the stock market. But today’s sentence shows that easy money has consequences. Investors engage in insider trading at their peril.”

“Mr. Liang breached the trust of his employment by obtaining sensitive information and using it for his own profit,” said Assistant Director in Charge McJunkin. “Together with our partner agencies, the FBI will continue to pursue and hold accountable those who perpetrate such financial crimes, as we work to protect American taxpayers and our financial markets.”

“Liang brazenly sought to profit based on sensitive, insider information. What he didn’t know is that investigators have been utilizing sophisticated technical tools to identify and track criminal behavior,” said Special Agent in Charge Elton Malone of the Office of Inspector General of the Department of Health and Human Services. “We will continue to insist that federal government employee conduct be held to the highest of standards.”

According to the court documents and statements made during his October 18, 2011, guilty plea and other court proceedings, Cheng Yi Liang was employed as a chemist since 1996 at the FDA’s Office of New Drug Quality Assessment (NDQA). Through his work at NDQA, Liang had access to the FDA’s password-protected internal tracking system for new drug applications, known as the Document Archiving, Reporting and Regulatory Tracking System (DARRTS), which is used to manage, track, receive and report on new drug applications. According to court documents, Liang reviewed DARRTS for information relating to the progression of experimental drugs through the FDA approval process. Much of the information accessible on the DARRTS system constituted material, non-public information regarding pharmaceutical companies that had submitted their experimental drugs to the FDA for review.

In his plea, Liang admitted that from approximately July 2006 through March 2011, he used the material, non-public information from DARRTS and other sources to trade in the securities of pharmaceutical companies. Liang used accounts of relatives and acquaintances, including his son, to execute the trades. When the FDA insider information about a company’s product was positive, Liang used accounts he controlled to purchase securities. When the FDA insider information was negative, Liang made trades in anticipation of the stocks’ downward movement. After the FDA’s action with respect to a drug was made public Liang executed trades to profit from the change in the company’s share price as a result of the FDA announcement, resulting in total profits and losses avoided of more than $3.7 million.

During the time he was employed by the FDA, Liang was required to file a Confidential Financial Disclosure form, disclosing, among other things, investment assets with a value greater than $1,000 and sources of income greater than $200. During the time period of his insider trading scheme, Liang annually filed these forms and failed to disclose using brokerage accounts he controlled or his income from the illicit securities trading. For example, on February 16, 2010, Liang signed and submitted his 2010 confidential financial disclosure form, which failed to disclose that during 2009, he earned approximately $1,040,000 from trading on FDA insider information.

To date, the Department of Justice has recovered over $1 million through the forfeiture of 9 bank and brokerage accounts in a related civil forfeiture action filed in the U.S. District Court in Maryland by the Criminal Division’s Asset Forfeiture and Money Laundering Section (AFMLS). The forfeiture of two real properties, a house and a condominium in Montgomery County, Md., is still pending. Liang previously consented to the entry of final judgment as to the Securities and Exchange Commission’s civil enforcement action against him, also in the District of Maryland.

This case was prosecuted by Assistant U.S. Attorney David Salem for the District of Maryland, Trial Attorneys Kevin Muhlendorf and Thomas Hall of the Criminal Division’s Fraud Section and Senior Trial Attorney Pamela J. Hicks and Trial Attorney Jennifer Ambuehl of the Criminal Division’s Asset Forfeiture and Money Laundering Section. The case was investigated by the FBI’s Washington Field Office and the HHS-OIG.

This case is an example of the close coordination between the Department of Justice and the SEC, specifically the Market Abuse Unit of the SEC’s Enforcement Division. The department recognizes the substantial assistance of the SEC, which conducted its own investigation and referred the conduct to the department.

This law enforcement action is part of President Barack Obama’s Financial Fraud Enforcement Task Force. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.

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