Throw the Book at This Guy

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.

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