Executives at Celgene Corp., Sanofi and Stryker Corp. were among six people charged for their roles in a health-care stock insider-trading ring that prosecutors said generated $1.48 million in illicit profit.
John Lazorchak, 42, director of financial reporting at Celgene, regularly tipped others to nonpublic information on acquisitions, quarterly earnings results and regulatory news, according to a Federal Bureau of Investigation complaint filed yesterday in federal court in Newark, New Jersey.
Mark Cupo, 51, the director of accounting and reporting at Sanofi-Aventis, now known as Sanofi; and Mark Foldy, 42, a marketing executive at Stryker Corp., also were charged. Prosecutors said most of the profit went to Lawrence Grum, 48, and Michael Castelli, 48, who also tipped friends and family. The case involves two sets of high school friends and at least one witness who secretly recorded Grum for the FBI.
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"Three of the defendants exploited their access to sensitive, confidential information at two New Jersey-based pharmaceutical companies and a prominent medical technology company," Paul Fishman, the U.S. attorney in New Jersey, said in a statement.
Michael Pendolino, 43, a high school friend of Lazorchak, also was charged in the FBI complaint. The Securities and Exchange Commission sued the six men, as well as a seventh, James Deprado, claiming they made $1.7 million in illicit profit.
The health-care industry has been hard-hit by insider trading. Before yesterday, at least 75 people had been sued by regulators or charged by prosecutors since 2008 for passing or getting insider-trading tips about pharmaceutical, biotechnology or other health-care stocks, Bloomberg News reported last week. With the FBI and SEC complaints, the number rose to at least 82.
Grum reassured Cupo that government investigators were unlikely to discover their scheme, according to the SEC.
"At the end of the day, the SEC's got to pick their battle because they have a limited number and huge numbers to go after," Grum told an FBI cooperating witness on Sept. 16, according to the arrest complaint.
The tips involved Celgene's announcement in November 2007 that it was buying Pharmion Corp. for $2.9 billion; Sanofi's announcement in March 2010 that it was buying Chattem Inc. for $1.9 billion; Celgene's news in June 2010 that it was buying Abraxis BioScience Inc. for $2.9 billion; and Stryker's announcement in May 2011 of plans to buy Orthovita Inc. for $316 million, according to the SEC.
Quarterly Earnings
They also involved six quarterly earnings announcements by Celgene, and the company's announcement in June that it was withdrawing an application in Europe for expanded use of its blood cancer drug Revlimid, according to the government.
The six men charged by the FBI all appeared yesterday afternoon in handcuffs in court in Newark. U.S. Magistrate Judge Joseph Dickson set bail at $500,000 for Lazorchak, Cupo, Grum and Castelli. He set bail at $250,000 for Foldy and Pendolino. Lawyers for the six men declined to comment.
"What makes this case so disturbing is that three inside executives were able to exploit the information that they learned in the course of their employment to benefit such a wide group of friends and family," said Colleen Lynch, assistant regional director of the SEC's Philadelphia regional office.
The investigation began after Celgene's acquisition of Abraxis, Lynch said in a phone interview.
"A computer analysis of trading patterns and records, and relationships among the parties, led us to uncover the insider trading ring that the defendants thought they were otherwise clever in hiding," Lynch said.
Lazorchak, Pendolino, Foldy and Deprado attended Colonia High School in New Jersey, according to the SEC. Castelli, Grum and a person referred to as Tippee 5 were classmates at a different high school not identified by the SEC, and they attended meetings of a winemaking club together.
Grum made about $735,000 in illicit profit, while Castelli made about $640,000, according to the SEC. Grum worked as an analyst of mortgage-backed securities and a securities trader between 1986 and 1990, the SEC said.
The SEC claims seven tippees who weren't sued benefited from the inside information. The FBI refers to three co- conspirators who attended Colonia High School, including a reporter at a financial news website and an employee in the risk assessment department of a New York-based hedge fund.
Brian Gill, a spokesman for Summit, New Jersey-based Celgene, said the company learned yesterday that Lazorchak would be charged. Lazorchak was fired yesterday morning, he said.
'Celgene's Values'
"It is our understanding that the investigation involved only one employee and not the company itself," he said in a statement. "Celgene is currently exploring its legal remedies. The actions taken by this employee violate Celgene's values, guiding principles and formal policies."
Jean-Marc Podvin, a spokesman for Paris-based Sanofi, the parent of Sanofi-Aventis, didn't immediately return a call.
"Mr. Foldy is no longer an employee and we have no further comments," Jo Johnson, a spokeswoman for Kalamazoo, Michigan- based Stryker, said in an e-mailed statement.
Lazorchak lives in Long Valley, New Jersey; Cupo, Castelli and Foldy live in Morris Plains, New Jersey; Grum in Livingston, New Jersey; Pendolino in Nashua, New Hampshire; and Deprado in Leesburg, Virginia. Pendolino is a chiropractor.
The case is U.S. v. Lazorchak, 12-mj-6755, U.S. District Court, District of New Jersey (Newark).
Bloomberg News
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