Big Pharmaccuticals; Ariad
The other day, hearing about the latest updates in the development of COVID-19 vaccines and monoclonal antibody treatments, it was impossible for me to not think of two things: the potential and the fraud.
The potential is obvious. To the company, possibly companies, developing a life-saving treatment, the future would be bright indeed. However as someone who delivers keynote addresses and training on ethics and ethical behavior, I also understand the in the world of Big Pharma, fraud is never far behind opportunity. This was just made clear in a case against Mr. Telemaque Lavidas.
Arial Pharmaceuticals
Telemaque Lavidas has just been sentenced by the United States Attorney’s office for the Southern District of New York. Lavidas, the son of a pharmaceutical company executive was given a one-year sentence for insider trading and had to pay restitution of more than $186,000 and a fine of $50,000.
His arrest underscores the need for Big Pharma and the SEC to be hyper-vigilant as more than a dozen companies now race to find a viable vaccine in record time.
In January 2021, Lavidas was convicted following his trial. The 39-year-old used information gained from his father (Athanase Lavidas), a member of the board of directors of Cambridge Massachusetts-based Arial Pharmaceuticals, and he passed information to a friend (and later a co-defendant). The friend used the information to make stock trades. Over time, Lavidas and his friend netted more than $15 million in profits.
As the case unfolded, the fraud became a friends and family-type affair. Though the father may not have been aware of what the son was doing with the insider information his son was providing, he violated the ethics of confidentiality agreement that he signed with the company. Over time, the father stupidly shared information about the drug and the company. On at least three occasions, the son used that information to share in profitable trades.
At Telemaque Lavidas’ direction, the friend slowly assumed a long position in the company. The father, a prominent businessman who was appointed to the Ariad board, was to learn at a closed meeting that the FDA had concerns about possible negative health issues. He mentioned it to his son, who in turn advised the friend to sell his “long” position in Ariad and take a short position. A short position essentially means that the more the stock drops, the more the friend could probably make for both of them. Prior to the news, there would have been no logical reason for the two trades.
When Ariad did go public with the FDA’s concerns, the friend made more than $3.2 million in profits. A “normal” investor with the same amount of stock and unsuspecting of the news, would have most probably lost $800,000. The news forced Ariad to stop sales of Iclusig.
Months later, when the father learned (according to the justice department release) that “Ariad and the FDA were making significant progress toward returning Iclusig to the market. Athanase Lavidas [the father] passed this secret information to [the son] who in turn passed the tips to Georgios Nikas [the friend].”
The friend then bought up a chunk of the stock, the stock rose and the friend made over $1.3 million in profits. They were not through, though. About a year and a half later, the father learned about an unsolicited takeover offer. When the takeover occurred, Ariad’s stock rose and the friend made over $2 million in profits.
Not Done Yet
Fraud often creates its own web. People get trapped in that web as they are lured to the opportunity to satisfy their need for profits.
Stupidly, the friend passed the tips even further to several other stock traders. This raised numerous flags that were not lost on the regulators who look for just this type of insider abnormality. In time, Lavidas, his friend and other traders made more than $15m in profits.
Presumably, everyone in the web will now share in paying fines and penalties.
The father, perhaps believing himself to be a big shot when appointed to the board, can now wear his fancy suits when he visits his son, and potentially his son’s friend, in jail. It is doubtful he will ever again sit on the board of a publicly-traded company again.
Regulatory agencies have gotten increasingly sophisticated in tracking insider trading. Officials, alerted by sophisticated algorithms, recognized the pattern when they saw it.
Assuming the father was motivated by ego and love and not greed, he unethically violated the rules and knew it. On the other hand, the son, Telemaque Lavidas, saw the opportunity, roped in the friend and then other investors to satisfy a need to make money.
They undoubtedly rationalized they were too clever to get caught, that they weren’t “hurting anyone,” not understanding that many have been caught in similar acts of arrogance.
And it will happen again. It leads me to thinking about multiple companies, working feverishly around the globe to develop vaccines and anti-viral medications to combat the pandemic. The front-running companies are publicly-traded.
In the frenzy of all of those moving parts, who is watching for fraud? Who is monitoring board members, their families and friends? Who is protecting the “regular investor?” As we go forward in this fight against the virus, I trust we won’t leave ethics behind.
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