HealthLawProf Blog

Editor: Katharine Van Tassel
Akron Univ. School of Law

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Sunday, August 14, 2005

Practice of Doctors Leaking Confidential Drug Testing Information to Wall Stree Is Growing

The Seattle Times found at least 26 instances where doctors leaked confidential and critical details of their ongoing drug research to Wall Street firms for money.  In 24 of the 26 cases, the firms issued reports to select clients with detailed information obtained from doctors involved in the confidential studies.  The reports advised clients whether to buy or sell a drug stock. 

Thomas Newkirk, a former associate director of enforcement at the SEC, says this is "a good way to go to jail," since trading stock based on secret information bought from medical researchers is illegal.  Experts are more or less in agreement that, whether or not paid, medical researchers who talk with investors about their ongoing research violate confidentiality agreements they sign before drug companies allow the drug testing to begin.  Ben McGraw, chief executive of California biotech company Valentis and former Wall Street analyst, says that "Everybody does this... it's now common practice."   The Seattle Times found that this practice is driven by hedge funds that can reap megaprofits with aggressive strategies that exploit quick price swings in stocks, and that the volatile biotech industry provides many such opportunities. 

This exchange of information is faciliated by matchmaker firms who pair Wall Street firms with doctors.  Investors pay up to $1 million a year to these matchmaker firms for physician-contacts.  Gerson Lehrman Group, the largest matchmaker, claims to have 60,000 doctors who will speak with investors on Wall Street.  The matchmakers usually pay doctors $300 to $500 an hour to talk with investors, with some doctors making tens of thousands a year from the practice. 

One danger of this practice is the risk that leaked details about ongoing research can introduce bias into drug trials and possibly halt development of potentially life-saving drugs.  Arthur Caplan, director of the Center for Bioethics at the University of Pennsylvania, says "The practice is a moral cesspool. . . . It really just seems to me to be the last straw in the corporatization of American medicine."  The practice also hurts ordinary investors as opposed to the elite investors who are not privy to this same  information.  The article provides further analysis of the forces behind this practice, including the economic forces and motives behind hedge funds and the growing industry around this practice, as well as positive effects of leaking this information.  The article concludes with a discussion of the legal ramifications of these practices: 

The US Supreme Court ruled in 1983 that because analysts don't owe allegiance to the companies they research, they are free to gather valuable information and pass it on to their customers.  Analysts who are free to collect tidbits of data that, when pieced together, may amount to valuable information not available to the public.   The court has also ruled that analysts can't coax someone to divulge company secrets, which it called "misappropriating" nonpublic information.  John Coffee,a law professor at Columbia University, said that it is clearly illegal to trade stock based on information obtained by paying doctors to leak confidential material about research they are doing for drug companies. He says that paying 20 doctors to answer the same question about the same drug trial is not the same as collecting tidbits of data. Misappropriating company secrets violates federal securities law.  And the practice of selling secrets if illegal for all parties involved, including doctors, hedge funds, and research analysts, legal experts say.

Lindley Bain, SMU/Dedman Law 3L, provided valuable research and drafting help with this post.  [tm]

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