Washington Editor

WASHINGTON - News that clinical trial investigators have been leaking study data to Wall Street traders has prompted a congressional call for an SEC investigation into the practice, though many who see it as commonplace have written it off as part of the game.

Sen. Chuck Grassley (R-Iowa), the chairman of the Senate Finance Committee, expressed shock at what allegedly has become a routine method of profiteering for trial investigators and their stock-selling cohorts. The former are paid for their inside scoops, which critics say compromises their confidentiality agreements by giving trends on ongoing studies that lead to early outcome projections, while the latter earn on trades triggered by such tips.

"These biotech stocks are generally cheaply priced and highly speculative," Kerry Fields, an associate professor at the University of Southern California's Marshall School of Business, told BioWorld Today. "Due to the nature of the stock, it encourages the use of this insider information. It's the modern gold rush."

He described a system that has developed in which pressures to achieve top investment results have driven traders to push ethical boundaries in seeking clinical trial disclosures in an effort to forecast stock activity. One analyst who spoke on background with BioWorld Today said managers of hedge funds, mutual funds and other portfolios are always seeking to draw from experts to guide investment decisions, and added that it's common across multiple industries and not a phenomenon unique to the healthcare sector. The process is known as a channel check, and apparently, doctors are more than willing to oblige as expert sources for biotech investors, especially when compensated, at times, up to $500 an hour for their insights into safety profiles, comparisons to standard treatments and other opinions.

Details of the practice initially were published earlier this week by the Seattle Times, which reported more than two dozen cases in which doctors had provided ongoing drug research data to the Street. While the report noted instances in which doctors are polled directly by securities firms, oftentimes the two parties are linked by way of third-party businesses that set up such relationships. Traders use information gleaned from multiple physicians to triangulate opinions on the prospects of a particular product to get a better handle on a business. Also, the drug companies themselves sometimes put buy- and sell-side analysts in touch with clinical trial investigators.

All sides have defended their actions, noting that such dealings operate outside federal securities regulations because existing laws categorize clinical trial investigators as experts, not insiders. Instead, that definition currently encompasses company directors, officers, employees and controlling shareholders. Other analysts who spoke with BioWorld Today said doctors and fund managers know their boundaries on disclosure, but added that the traders would always try to push those limits.

That's why Grassley and others are sharply critical.

"It's highly unethical," said Fields, who frequently comments on business ethics to professional organizations outside the classroom. "Politicians should urge the SEC and state regulators to declare this to be a true breach of fiduciary duties and liability for insider information."

He argued that experts involved in research and development projects for publicly traded companies should be held to a higher standard, that of an insider. The SEC's web site labels insider trading as "buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include tipping' such information, securities trading by the person tipped' and securities trading by those who misappropriate such information."

In the past, Fields said courts have ruled that experts are not considered insiders to preserve their independent contractor status, an exception that has allowed clinical trial investigators to operate in consultation with traders. But obviously that gray area has become murky.

Fields said it is routine for those who overstep ethical boundaries in the business world to rationalize their actions, claiming that by only providing clues at a certain time in a clinical study, they are not giving absolutes. That justifies the practice, in their eyes.

"But in truth," he said, "it's a complete dismissal of their ethical obligations, aside from their legal ones."

And Fields said the problem has rested on the shoulders of such clinical trial investigators, who have chosen to act in favor of taking a few carrots dangled by stock traders.

"Only if we impose civil liability on those experts, with insider trading liability, can we get rid of the problem," he said.

That could happen, analysts acknowledged, but the financial community would likely adapt to any restrictions. They said fund managers would continue to find a way to forecast good investment decisions for their clients - that's their business.