The Doc, the Hedge Fund, and Insider Trading

Dr. Yves Benhamou was a paid adviser to Human Genome Science (HGSI), the developer of the hepatitis C drug, Albuferon.  However, the good doc from France was also a paid adviser to six hedge funds.  There’s a French recipe for mischief. According to the Feds’ charges, along about November 2007, Dr. B passed some valuable, albeit nonpublic,  information about poor clinical trial (one death had resulted) results for Albuferon, along to FrontPoint Partners (one of the aforesaid six hedge funds).  FrontPoint then unloaded its HGSI shares before negative information about the Albuferon results was disclosed publicly.  An “unnamed co-conspirator”  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.  On January 23, 2008, HGSI announced the poor clinical results and its plans for the trials going forward.  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.  Morgan Stanley, in the process of acquiring FrontPoint has not been accused of any wrongdoing and no one from Morgan was involved.  

 Insider trading is a nasty legal issue.  However, even without the criminal charges, there is the ethical issue of taking unfair advantage.  You have information that the market (including those who purchase your shares) do not.  You are also hiding information that is material to the person with whom you are doing business.  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.  Damage to a car and damage to a stock play out differently factually, but the ethical issues are the same:  A seller withheld material information and the buyer didn’t know.  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.  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.  That’s the stuff that runs efficient markets – unfair advantage and lack of full disclosure undermine both trust and markets.

About mmjdiary

Professor Marianne Jennings is an emeritus professor of legal and ethical studies from the W.P. Carey School of Business at Arizona State University, retiring in 2011 after 35 years of teaching undergraduate and graduate courses in ethics and the legal environment of business. During her tenure at ASU, she served as director of the Joan and David Lincoln Center for Applied Ethics from 1995-1999. In 2006, she was appointed faculty director for the W.P. Carey Executive MBA Program. She has done consulting work for businesses and professional groups including AICPA, Boeing, Dial Corporation, Edward Jones, Mattel, Motorola, CFA Institute, Southern California Edison, the Institute of Internal Auditors, AIMR, DuPont, AES, Blue Cross Blue Shield, Motorola, Hy-Vee Foods, IBM, Bell Helicopter, Amgen, Raytheon, and VIAD. The sixth edition of her textbook, Case Studies in Business Ethics, was published in February 2011. The ninth edition of her textbook, Business: lts Legal, Ethical and Global Environment was published in January 2011. The 23rd edition of her book, Business Law: Principles and Cases, will be published in January 2013. The tenth edition of her book, Real Estate Law, will also be published in January 2013. Her book, A Business Tale: A Story of Ethics, Choices, Success, and a Very Large Rabbit, a fable about business ethics, was chosen by Library Journal in 2004 as its business book of the year. A Business Tale was also a finalist for two other literary awards for 2004. In 2000 her book on corporate governance was published by the New York Times MBA Pocket Series. Her book on long-term success, Building a Business Through Good Times and Bad: Lessons from Fifteen Companies, Each With a Century of Dividends, was published in October 2002 and has been used by Booz, Allen, Hamilton for its work on business longevity. Her latest book, The Seven Signs of Ethical Collapse was published by St. Martin’s Press in July 2006 and has been a finalist for two book awards. Her weekly columns are syndicated around the country, and her work has appeared in the Wall Street Journal, the Chicago Tribune, the New York Times, Washington Post, and the Reader's Digest. A collection of her essays, Nobody Fixes Real Carrot Sticks Anymore, first published in 1994 is still being published. She has been a commentator on business issues on All Things Considered for National Public Radio. She has served on four boards of directors, including Arizona Public Service (1987-2000), Zealous Capital Corporation, and the Center for Children with Chronic Illness and Disability at the University of Minnesota. She was appointed to the board of advisors for the Institute of Nuclear Power Operators in 2004 and served on the board of trustees for Think Arizona, a public policy think tank. She has appeared on CNBC, CBS This Morning, the Today Show, and CBS Evening News. In 2010 she was named one of the Top 100 Thought Leaders in Business Ethics by Trust Across America. Her books have been translated into four different languages. She received the British Emerald award for authoring one of their top 50 articles in management publications, chosen from over 15,000 articles. Personal: Married since 1976 to Terry H. Jennings, Maricopa County Attorney’s Office Deputy County Attorney; five children: Sarah, Sam, and John, and the late Claire and Hannah Jennings.
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