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Selling Drug Secrets

A special report by Luke Timmerman and David Heath August 7, 2005

Selling Drug Secrets

Sellers, buyers of secrets risk being prosecuted

Paying doctors to divulge secrets capable of influencing stock prices violates federal insider-trading laws, legal experts say.

Even though research doctors typically aren't employed by drug companies, they have company secrets that they agree not to divulge. Courts have ruled that if someone with company secrets sells them, he or she is guilty of "misappropriating" information and can be prosecuted under insider-trading laws.

Likewise, anyone who buys the information for the purposes of trading stock also can be prosecuted.

The Securities and Exchange Commission typically investigates insider-trading claims, but the SEC has the power to take only civil actions. The Justice Department decides whether to file criminal charges. Thomas Newkirk, a former SEC enforcement officer, said criminal charges are considered if the violation is intentional.

State attorneys general, who enforce state securities laws, could also take action against doctors who sell secrets or investors who buy them.

Drug companies can sue doctors for breaking their confidentiality agreements. The companies also can sue hedge funds or brokerage firms that pay or coax the doctors to break their vows.

However, this happens rarely, if ever, because companies rely on doctors to endorse their research and prescribe their drugs, an industry expert said.

"When you have a relation between a company and a clinical trialist, that's an important relationship. I can understand why companies would be reluctant to engage in litigation with that person," said Charles Lucas, general counsel of the Biotechnology Industry Organization, a Washington, D.C., trade group for drug-development companies.

Pam Sayad, a San Francisco lawyer who advises drug companies when doctors violate confidentiality agreements, agreed. Her advice to companies:

"Don't run into court to file a lawsuit. Talk to the doctor and tell the doctor about the obligations. You tell them, 'You've been in breach, and you better keep your mouth shut.' "

— David Heath