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Throw a dart to pick which way you're going to go on a binary stock event, and you'll be right 50% of the time. But look at the Food and Drug Administration's private documents server, and you can increase your win percentage substantially -- to the tune of $3.6 million.

Of course, that would be highly illegal, as Cheng Yi Liang found out yesterday when the Securities and Exchange Commission charged him and his son with insider trading, among other allegations.

Liang works -- or more likely, worked, since I imagine he's since been fired -- as a chemist for the FDA. After gaining access to information about whether the FDA would approve a drug or not, Liang is accused of buying or shorting stocks 27 different times. In some cases, like Momenta Pharmaceuticals (Nasdaq: MNTA  ) , the SEC claims he worked both sides of the fence, shorting it before the delay in 2007, then going long last year when its generic version of sanofi-aventis' (NYSE: SNY  ) Lovenox was finally approved.

The biggest gains come when investors can correctly predict a decision that everyone else doesn't think will happen. Not surprisingly, Liang's biggest gains reportedly came from Vanda Pharmaceuticals' (Nasdaq: VNDA  ) approval of Fanapt, for which Liang reportedly raked in more than $1 million by betting on the long-shot approval.

The SEC claims that Liang didn't always get his initial bet right. He reportedly initiated long positions in POZEN (Nasdaq: POZN  ) and MannKind (Nasdaq: MNKD  ) , but sold the shares before the decision, after he figured out that the FDA was going to rule against the drugs. If an FDA chemist's gut reaction isn't right, what does that say about the average investor's chances?

I'm a little surprised that Dendreon (Nasdaq: DNDN  ) -- one of the more shocking FDA decisions in the last few years -- wasn't on the list. Perhaps since he worked for the Center for Drug Evaluation and Research, Liang only had access to New Drug Applications, not the Biologics License Applications processed by the Center for Biologics Evaluation and Research?

Clearly, trading on inside information isn't fair to individual investors. Liang has allegedly been profiting from such practices since 2006. We can only hope the FDA institutes procedures that make it easier to catch these kinds of acts.

Looking for some stock investment ideas without any inside information? Click here to get a free report with six stocks David and Tom Gardner think you should be watching.

Momenta Pharmaceuticals is a Motley Fool Rule Breakers recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (7)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 30, 2011, at 3:00 PM, surfish wrote:

    FDA == SEC, useless.

  • Report this Comment On March 30, 2011, at 3:27 PM, nonya88 wrote:

    what Dendreon that's small peanuts(even Vanda's run up on Fanapt was small) compared to what he could have made buying TTNP (titan pharma) before the FDA reversed it's decision on Fanapt. They could have loaded up at .03 before the reversal and then dumped easily at over 1.50 afterward!

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