Dr. Yves Benhamou was a paid adviser to Human Genome Science (HGSI), the developer of the hepatitis C drug, Albuferon. Â However, the good doc from France was also a paid adviser to six hedge funds.Â Thereâ€™s a French recipe for mischief. According to the Fedsâ€™ charges, along about November 2007, Dr. B passed some valuable, albeit nonpublic, Â information about poor clinical trial (one death had resulted) results for Albuferon, along to FrontPoint Partners (one of the aforesaid six hedge funds). Â FrontPoint then unloaded its HGSI shares beforeÂ negative information about theÂ Albuferon results was disclosed publicly. Â An â€œunnamed co-conspiratorâ€ Â at FrontPoint then unloaded a large chunk of HGSI shares during the period from November 2007 through January 2008, saving an estimated $30 million in losses.Â On January 23, 2008, HGSI announced the poor clinical results and its plans for the trials going forward.Â HGSI shares then fell 44% to $5.62, and FrontPoint went back into the market to buy.FrontPoint is not named in the charges, and HGSI is cooperating fully and has not been accused of any wrongdoing, The FrontPoint co-portfolio manager for health care funds at the firm has been placed on leave as FrontPoint conducts its internal investigation. Dr. B has not spoken and his lawyer has not returned calls.Â Morgan Stanley, in the process of acquiring FrontPointÂ has not been accused of any wrongdoing and no one from Morgan was involved. Â
Â Insider trading is a nasty legal issue.Â However, even without the criminal charges, there is the ethical issue of taking unfair advantage.Â You have information that the market (including those who purchase your shares) do not.Â You are also hiding information that is material to the person with whom you are doing business.Â Funny how stridently we demand recompense when a dealer sells us a used car but failed to disclose that the car had been in an accident, had its share of problems, and, therefore, was worth less than represented.Â Damage to a car and damage to a stock play out differently factually, but the ethical issues are the same:Â A seller withheld material information and the buyer didnâ€™t know.Â A universal ethical standard of full and fair disclosure is at the heart of the insider trading rules just as it is at the heart of disclosures during contract formation.Â You need full and fair disclosure in both if trust is to survive and trust is a prerequisite for us to be able to click along confidently on our transactions. Â Thatâ€™s the stuff that runs efficient markets â€“ unfair advantage and lack of full disclosure undermine both trust and markets.