Hedge Fund Portfolio Manager Sanjay Valvani And Former Portfolio Manager Stefan Lumiere Charged In Manhattan Federal Court
Gordon Johnston, a Political Intelligence Consultant, and Christopher Plaford, a Former Hedge Fund Portfolio Manager, Have Each Pled Guilty and Are Cooperating with the Government
Preet Bharara, the United States Attorney for the Southern District of New York, Diego Rodriguez, the Assistant Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), and Elton Malone, Special Agent in Charge, Special Investigations Branch, U.S. Department of Health and Human Services, Office of Inspector General (“HHS-OIG”), announced today charges against SANJAY VALVANI and STEFAN LUMIERE, a portfolio manager and former portfolio manager, respectively, at a healthcare-focused hedge fund in New York, New York (“Investment Adviser-A”).
VALVANI was charged with participating in a scheme, from in or about 2005 through in or about January 2011, to convert United States property, to defraud the United States, and to commit securities fraud and wire fraud relating to VALVANI’s agreement with GORDON JOHNSTON, a political intelligence consultant and former senior official at the Food and Drug Administration (“FDA”), to unlawfully obtain highly confidential and material nonpublic information from the FDA about the agency’s approval of pending generic drug applications and convert it to VALVANI’s use, including by using the information to execute profitable securities transactions. VALVANI is also charged with passing certain highly confidential and material nonpublic information to CHRISTOPHER PLAFORD, a former portfolio manager at Investment Adviser-A, who also executed trades based on the information. In addition, Mr. Bharara announced today the unsealing of charges against JOHNSTON and PLAFORD, who both pled guilty and admitted to their participation in the scheme. As part of the scheme, for example, at VALVANI’s direction, JOHNSTON obtained highly confidential and material nonpublic information from a senior FDA official about the status and approval of a generic drug called enoxaparin, which information JOHNSTON passed to VALVANI. VALVANI used this information to trade in the securities of two pharmaceutical companies likely to be affected by an approval of a generic enoxaparin application, earning approximately $25 million in trading profits when the FDA announced its first such approval. VALVANI also tipped PLAFORD with this information. VALVANI surrendered to authorities this morning.
Separately, LUMIERE was charged with participating in a scheme with PLAFORD, from in or about June 2011 through in or about September 2013, to commit securities and wire fraud relating to the mismarking of securities in a fixed-income fund for which PLAFORD was the portfolio manager at the time, which inflated the net asset value (“NAV”) of the fund and overstated the fund’s liquidity. LUMIERE surrendered to authorities this morning. PLAFORD also pled guilty to his participation in this scheme, as well as an additional scheme involving another political intelligence consultant.
VALVANI will be presented and arraigned later today before United States District Judge Sidney H Stein. LUMIERE will be presented later today before U.S. Magistrate Judge James C. Francis IV. JOHNSTON’s case is assigned to U.S. District Judge Andrew L. Carter, Jr., and PLAFORD’s case is assigned to U.S. District Judge Ronnie Abrams.
In separate actions, the Securities and Exchange Commission (“SEC”) filed civil charges against VALVANI, LUMIERE, JOHNSTON, and PLAFORD.
U.S. Attorney Preet Bharara said: “As alleged, Valvani, Johnston, and Plaford conspired to extract highly confidential and tightly guarded information about pending applications for generic drug approvals from the FDA, and traded on such information, reaping millions of dollars in illegal profits. Lumiere and Plaford also allegedly conspired to mismark securities held by their fund, lying to their investors and unjustly enriching themselves in the process.”
FBI Assistant Director-in-Charge Diego Rodriguez said: “As alleged, the defendants conspired and schemed over six years to obtain insider information from the FDA on the status of approvals for generic drugs in order to take that information and use it to make securities trades. Additionally, some of those same defendants schemed to defraud investors from an fixed-income fund by deceptively mismarking the value of certain securities. Sadly these are schemes we see time and time again, where lies and use of nonpublic information profits those conducting the crimes and everyday investors lose out.”
HHS-OIG Special Agent in Charge Elton Malone said: “Trading on confidential, non-public FDA information corrupts the carefully guarded drug approval process and simply will not be tolerated. People hoping to profit from insider data will be aggressively prosecuted for their crimes.”
According to the allegations in the charging documents unsealed today in Manhattan federal court, including the Indictment charging VALVANI and the Complaint charging LUMIERE, and statements made in court proceedings:
At all relevant times, Investment Adviser-A managed hedge funds specializing in healthcare-related investments. One such fund focused on long-short equity investments in healthcare companies (“Fund-1”). Another fund, which operated from in or about 2009 until in or about September 2013, invested primarily in debt instruments issued by healthcare companies (“Fund-2”).
VALVANI served as a partner in Investment Adviser-A and one of Fund-1’s portfolio managers, managing the specialty pharmaceuticals portfolio within Fund-1. From in or about May 2009 through in or about September 2013, PLAFORD served as a partner in Investment Adviser-A and as Fund-2’s portfolio manager. LUMIERE served under PLAFORD as the Fund-2 portfolio manager for special situations, which represented a portion of Fund-2’s portfolio.
The Scheme to Convert and Use Confidential FDA Information
As alleged in the Indictment, from in or about 2005 through in or about January 2011, VALVANI, JOHNSTON, PLAFORD, and others participated in a scheme to convert to their own use confidential and material nonpublic information from the FDA concerning, among other things, the FDA’s internal deliberations regarding the approval of generic drug applications for the purpose of making profitable securities transactions.
During this time period, Investment Adviser-A retained JOHNSTON as a consultant who provided “political intelligence” related to, among other things, the likelihood and timing of the FDA’s approval of generic drugs. JOHNSTON primarily consulted for VALVANI, and Investment Adviser-A paid JOHNSTON hundreds of thousands of dollars in total for his consulting work. Before becoming a consultant, JOHNSTON had served as the Deputy Director of the FDA’s Office of Generic Drugs (“OGD”), an office within the FDA charged with, among other things, approving generic drugs. In addition to serving as consultant to Investment Adviser-A, JOHNSTON worked for a trade association for manufacturers and distributors of generic drugs (the “Trade Association”). As a result of his long employment with the FDA, as well as his ongoing work with the Trade Association, JOHNSTON maintained close relationships with FDA insiders.
VALVANI tasked JOHNSTON with obtaining highly confidential and material nonpublic information from the FDA about pending generic drug ANDAs and related citizen petitions, information that FDA employees were not authorized to disclose to the public. An ANDA, or Abbreviated New Drug Application, is the process by which a pharmaceutical company can apply to the FDA for approval to sell a generic version of a brand name drug. In many cases, the brand name drug company files a citizen petition with the FDA challenging the generic drug company’s ANDA and arguing that the FDA should deny it. The FDA’s decision to approve a generic drug ANDA typically has a positive impact on the stock price of the company receiving approval, and a negative impact on the stock price of the company producing the brand name drug.
The Enoxaparin ANDA Approval
As alleged in the Indictment, at the direction of VALVANI, JOHNSTON improperly obtained confidential and material nonpublic information concerning the FDA’s approval of a generic version of an anticoagulant drug called enoxaparin and passed this information to VALVANI, which VALVANI used to make profitable securities trades. Beginning in the mid-1990s, Sanofi-Aventis S.A. (“Sanofi”) manufactured and sold enoxaparin under the brand name Lovenox. By 2005, three groups of publicly traded pharmaceutical companies had filed ANDAs with the FDA seeking approval to sell a generic version of Lovenox, including one such application filed by a publicly traded pharmaceutical company that had partnered with Momenta Pharmaceuticals, Inc. (“Momenta”) (the “Momenta ANDA”). After the first two ANDAs were filed, Sanofi filed a citizen petition with the FDA opposing the approval of a generic version of Lovenox. These three ANDAs were pending with the OGD for years, during which time it was unclear whether OGD would approve a generic version of Lovenox.
Beginning in or about 2005, VALVANI directed JOHNSTON to gather confidential and material nonpublic information from FDA employees about the FDA’s consideration of the enoxaparin ANDAs. JOHNSTON, in turn, improperly obtained such information from a senior OGD official (“Individual-1”), who was close friends with and a former colleague of JOHNSTON’s. Individual-1 participated in internal, confidential meetings regarding the Momenta ANDA. As part of the ANDA review and approval process, OGD maintained an internal document tracking the progress of ANDAs, including the Momenta ANDA, and estimating the likelihood and timing of their approval (the “Tracking Document”). The information contained in the Tracking Document was highly confidential and not intended to be disclosed to anyone outside the FDA. Nonetheless, Individual-1 disclosed confidential and material nonpublic information about the status of the approval of a generic Lovenox ANDA, including information from the highly confidential Tracking Document, to JOHNSTON. JOHNSTON breached a duty of trust to Individual-1 by passing the information to VALVANI, as JOHNSTON knew that Individual-1 expected him to keep the information confidential based on their history of sharing and keeping such confidences.
For example, in or about late December 2009 or early January 2010, JOHNSTON told VALVANI, in sum and substance, that he had learned that the Tracking Document reflected that OGD was moving toward approval of a generic Lovenox ANDA. This was information that was not known to the public and was not supposed to be known by anyone outside of the FDA. Based on his prior role at OGD, JOHNSTON understood this to mean that the ANDA approval was highly likely and could occur in a matter of months, which information JOHNSTON shared with VALVANI. VALVANI asked JOHNSTON to continue to contact his FDA sources to obtain additional updates about the agency’s internal deliberations related to the approval of a generic Lovenox ANDA.
Beginning on or about January 4, 2010, after receiving the tip from JOHNSTON, VALVANI requested that Investment Adviser-A give JOHNSTON a raise. In a January 6, 2010, email to Investment Adviser-A’s chief financial officer, VALVANI sought to justify providing a raise to JOHNSTON by stressing how important JOHNSTON was to him: “[JOHNSTON] is without question the most valuable consultant I’ve ever worked with and I’m pushing to reinforce the value of the relationship and encourage him to continue to go above and beyond for our team.”
The next day, on or about January 7, 2010, VALVANI caused Fund-1 to begin to increase its long position in Momenta by four-fold. By on or about July 23, 2010, Fund-1 held an approximately 2,962,715-share long position in Momenta stock valued at approximately $35 million. Beginning on or about January 14, 2010, VALVANI caused Fund-1 to short Sanofi securities. By on or about July 23, 2010, Fund-1 held an approximately 1,320,454-share short position in Sanofi’s European-traded stock and an approximately 509,854-share short position in Sanofi’s American Depository Receipts (“ADRs”), together valued at approximately $78 million.
VALVANI also passed to PLAFORD the information that he had obtained from JOHNSTON, so that PLAFORD could execute securities trades in Fund-2, which he did. PLAFORD understood this information to be highly confidential and material nonpublic information of the most sensitive kind that had been obtained from JOHNSTON’s source in the FDA.
On or about July 23, 2010 – approximately seven years after the first ANDA was filed – the FDA approved the Momenta ANDA (and denied Sanofi’s related citizen petition). This approval was positive news for Momenta, as Momenta was the first company to receive generic Lovenox approval, and the company’s stock price increased by nearly 100 percent in one day. The approval of the Momenta ANDA was negative news for Sanofi, which no longer had a monopoly on the drug, and the price of Sanofi’s stock and ADRs declined. Following the FDA’s announcement, VALVANI caused Fund-1 to sell the Momenta shares it held and to close out its short positions in Sanofi ADRs and stock, yielding a total profit of approximately $25 million.
In or about early January 2011, VALVANI called JOHNSTON and stated, in sum and substance, that Investment Adviser-A had decided to end its relationship with JOHNSTON in the wake of news reports of insider trading investigations.
The Scheme to Mismark Securities
As alleged in the Complaint, from in or about June 2011 through in or about September 2013, LUMIERE, PLAFORD, and others participated in a scheme to defraud Fund-2’s investors and potential investors by deceptively mismarking each month the value of certain securities held by Fund-2. The objective of the scheme was two-fold: (1) to inflate Fund-2’s NAV; and (2) to mislead investors about the liquidity of Fund-2’s holdings. Investment Adviser-A assessed performance fees to be paid by investors each year based on Fund-2’s profits and losses. LUMIERE’s mismarking was in violation of Investment Adviser-A’s internal valuation procedures and contrary to Investment Adviser-A’s representations to investors. The effect of the scheme was to overstate Fund-2’s NAV, often by tens of millions of dollars as calculated at the end of each month, which resulted in higher payments to Investment Adviser-A and higher bonuses for LUMIERE, among other benefits. The effect of the scheme was also to deceive investors into believing that certain securities were properly categorized as Level II, or securities with a quoted price but in a more inactive market, when, in fact, these securities were highly illiquid Level III investments.
As to the first form of the scheme, LUMIERE, PLAFORD, and others solicited, obtained, and relied on false and fraudulent price quotes from employees of broker-dealers in order to improperly override prices calculated by Fund-2’s administrator and artificially inflate Fund-2’s NAV each month. For each month-end valuation, LUMIERE and/or PLAFORD would begin by reviewing an inventory of Fund-2’s investments and proposed valuations for each prepared by Fund-2’s administrator and Investment Adviser-A’s back office. LUMIERE and/or PLAFORD would then identify those relatively illiquid securities as to which they disagreed with or disliked the proposed price, and create a list reflecting the price at which they wanted each security to be marked for month-end valuation purposes. That price was often significantly higher or lower than the price available from public price data. LUMIERE, PLAFORD, and others would then contact one or two “friendly” brokers and dictate to the friendly brokers the price quotes that they needed. The brokers would then parrot back the price quotes from their Bloomberg email account, giving the price quotes the appearance that they had come from an independent broker, and thus were in compliance with Fund-2’s pricing methodology. PLAFORD then submitted the friendly brokers’ sham quotes as purportedly independent bases for that security’s valuation to Investment Adviser-A’s accounting department, for the eventual submission to Fund-2’s administrator.
By obtaining these sham quotes, LUMIERE and PLAFORD caused a number of Fund-2’s securities to be misclassified in order to mislead investors about the liquidity of the securities (i.e., how actively traded the securities were). Specifically, for a number of illiquid bonds, LUMIERE and PLAFORD fraudulently caused Investment Adviser-A to assign a classification that led investors to believe that the bonds were relatively liquid, when in fact they were entirely illiquid. This was done contrary to disclosures to investors about Fund-2’s percentage of illiquid investments, in order to induce investors to invest in or keep their money in Fund-2.
As to the second form of the scheme, LUMIERE and PLAFORD purchased additional quantities of certain securities – in which Fund-2 had an established position – at a deceptively inflated price, markedly higher than the prevailing market was offering that security, in a practice known as “painting the tape.” PLAFORD would then report that inflated price to Investment Adviser-A’s accounting department for NAV purposes. In both cases – the sham broker quotes and the inflated purchase prices – it was LUMIERE and PLAFORD’s intent to increase the price of certain securities in order to inflate Fund-2’s month-end valuation.
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VALVANI, 44, of Brooklyn, New York, is charged with five counts: one count of conspiracy to convert United States property, to commit securities fraud and to defraud the United States; two counts of securities fraud; one count of conspiracy to commit wire fraud; and one count of wire fraud. Count One carries a maximum sentence of five years in prison. Counts Two through Five each carry a maximum sentence of 20 years in prison. The charges also carry a maximum fine of $5 million, or twice the gross gain or loss from the offense.
LUMIERE, 45, of New York, New York, is charged with three counts: one count of conspiracy to commit securities fraud and wire fraud; one count of securities fraud; and one count of wire fraud. Count One carries a maximum sentence of five years in prison. Counts Two and Three each carry a maximum sentence of 20 years in prison. The charges also carry a maximum fine of $5 million, or twice the gross gain or loss from the offense.
On June 9, 2016, PLAFORD, 38, of Bedford, New York, pled guilty before Judge Abrams to seven counts: one count of conspiracy to commit securities fraud and wire fraud; one count of securities fraud; one count of conspiracy to defraud the United States and to convert United States property; one count of conversion of United States property; one count of conspiracy to convert United States property, to commit securities fraud, and to defraud the United States; one count of securities fraud; and one count of conspiracy to commit wire fraud. Counts One, Three, and Five each carry a maximum sentence of five years in prison. Counts Two, Six, and Seven each carry a maximum sentence of 20 years in prison. Count Four carries a maximum sentence of 10 years in prison. The charges also carry a maximum fine of $5 million, or twice the gross gain or loss from the offense.
On June 13, 2016, JOHNSTON, 64, of Olney, Maryland, pled guilty before Magistrate Judge James C. Francis IV to four counts: one count of conspiracy to convert United States property, to commit securities fraud, and to defraud the United States; one count of securities fraud; one count of conspiracy to commit wire fraud; and one count of wire fraud. Count One carries a maximum sentence of five years in prison. Counts Two through Four each carry a maximum sentence of 20 years in prison. The charges also carry a maximum fine of $5 million, or twice the gross gain or loss from the offense.
The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendants will be determined by the judge.
Mr. Bharara praised the work of the FBI and HHS-OIG, and thanked the SEC for its assistance.
The charges were brought in connection with the President’s Financial Fraud Enforcement Task Force. The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. attorneys’ offices, and state and local partners, it is the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions and other organizations. Since fiscal year 2009, the Justice Department has filed over 18,000 financial fraud cases against more than 25,000 defendants. For more information on the task force, please visit www.StopFraud.gov.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Ian McGinley, Damian Williams, and Joshua A. Naftalis are in charge of the prosecution.
The allegations contained in the Indictment and the Complaint are merely accusations, and the defendants are presumed innocent unless and until proven guilty.
 As the introductory phrase signifies, the entirety of the text of the Indictment and the Complaint, and the description of the Indictment and the Complaint set forth herein, constitute only allegations, and every fact described should be treated as an allegation.