Ex-FDAer Settles with SEC Over Insider Trading Scheme

Former FDA Office of Generic Drugs deputy director turned consultant Gordon Johnston, who pled guilty in June for being part of an insider trading scheme (see story), has agreed to a settlement with the SEC. Under the agreement, Johnston must return the illegal profits (disgorgement) and pay a civil penalty, amounts that have yet to be determined.

The insider scheme saw Johnston obtaining highly confidential and material nonpublic information from a senior FDA official about the status and impending approval of generic enoxaparin (Sanofi-aventis’ blockbuster Lovenox). According to government and court documents, the information that Johnston illegally obtained was passed on to hedge fund managers who used it to make stock trades in violation of insider trading laws and regulations.

Back in 2010, this and similar ANDAs were very contentious at the agency. According to agency information posted at the time of approval, many challenges had to be overcome before any generic anoxaparin could be approved. FDA said that the criteria typically used to approve generic drugs in this class were inadequate by themselves and that additional criteria were needed. The agency established a series of rigorous overlapping criteria to ensure that the heparin source material, the chemical reaction used in the manufacturing process, and the structure of the active ingredient was equivalent to Lovenox and that the generic product has the same degree of anticoagulant activity.

Johnston passed the pending approval decision information to hedge fund manager Sanjay Valvani, who increased his fund’s holdings in anticipation of the approval. Once approved, Momenta’s stock surged almost 100%. The fund also held short positions in Sanofi’s stock. After the approval, the fund closed out its positions and netted a total profit of $25 million. Johnston received an undisclosed monthly consulting fee for his work for the hedge fund from 2005 to 2011. After the scheme unraveled, Valvani committed suicide.

Johnston retired from FDA in 1998. In 2003, he joined the Generic Pharmaceutical Association as vice president of regulatory affairs. He left GPhA in 2011 and started a consulting practice. Prior to joining GPhA, Johnston worked for four years as an associate for Lachman Consultant Services, Westbury, NY, providing regulatory and technical advice on FDA requirements and review procedures.

When he pled guilty in June, Johnston also faced jail time and a substantial fine. Those issues reportedly will be decided by a federal judge after the SEC has filed an expected motion.