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By: John Goselin and Ze’eva Kushner Banks
Be forewarned! The Securities and Exchange Commission continues to hunt down individuals for improper insider trading. Last week, the S.E.C. announced charges against Doctor Edward Kosinski for violations of the antifraud provisions of the federal securities laws by buying and selling shares of Regado Biosciences, Inc. (“Regado”) based on inside information. And the regulator is not simply seeking disgorgement of ill-gotten gains. The S.E.C. wants Doctor Kosinski to go to jail!!
Regado was a biotech company working on developing a drug called REG-1 to help regulate clotting in patients undergoing heart surgery. Doctor Kosinski, a cardiologist, was also the president of Connecticut Clinical Research, LLC, and through this venture, Doctor Kosinski served as principal investigator of the drug trial of REG-1. Doctor Kosinski had various contractual duties to keep any information he learned in connection with participating in the drug trial strictly confidential. Doctor Kosinski, however, couldn’t resist the temptation to make multiple purchases of shares of Regado stock. Moreover, Doctor Kosinski failed to disclose his ownership in the company as required. The value of Doctor Kosinski’s investment in Regado increased from approximately $34,090 in October 2013 to $250,800 by the end of May 2014.
June 29, 2014 was the beginning of the end for Doctor Kosinski. Doctor Kosinski received important, undisclosed confidential information about Regado’s decision to put the REG-1 drug trial on hold due to serious allergic reactions suffered by some participants. The very next day, Doctor Kosinski sold all of his shares in Regado for a profit. When Regado ultimately made that same information public, the share price of Regado stock fell by 58%. Consequently, Kosinski avoided a loss of approximately $160,000 by using his undisclosed, inside information to sell prior to the public announcement.
Nonetheless, Doctor Kosinski was not finished. When he received additional undisclosed, confidential information a month later about the death of a participant in the drug trial, he bet that the price of Regado shares would drop further. Just as before, after the company publicly released the information, its share price dropped drastically. Doctor Kosinski’s bet against the stock price made him a profit of around $3,291.
The Securities and Exchange Commission has charged Doctor Kosinski with violating provisions of both the Securities Act of 1933 and the Securities Exchange Act of 1934. Doctor Kosinski violated these antifraud provisions by trading in Regado’s stock based on confidential information that had not been made public. The Securities and Exchange Commission is demanding that Doctor Kosinski return all the profits he made and/or the losses he avoided in addition to pay a penalty. Doctor Kosinski could also find himself in jail. Of course, Doctor Kosinski is also likely spending any profits he made to pay for his legal costs.
It is important to remember that professionals whether they are doctors, lawyers, accountants or just managers in a corporation can find themselves in possession of undisclosed confidential information about a publicly traded company. You can receive this information through your business relationships, your personal friendships or even just chatting with the neighbors about how their summer may be going. If you happen to learn important information, you need to be very cautious about buying or selling stock based in this confidential information. In fact, you should not even consider buying or selling stock under these circumstances. If you have any doubts, but feel compelled to make a purchase or a sale, you should really seek a second opinion.