D'oh! SEC Busts Indevus Insider Who Could Have Profited by Not Selling

Last Updated Jan 13, 2010 10:42 AM EST

The SEC seems to be trying to teach the pharmaceutical business a lesson about insider trading: It's only going after the dumbest execs it can find.

Case in point: Indevus vp of corporate communications Brooke D. Wagner. He sold Indevus stock in the knowledge that one of its drugs was not going to pass muster with the FDA -- but by doing so actually managed to lose money he could have made honestly had he held on to his position.

On May 30, 2008, according to the SEC, Wagner was on a conference call in which the FDA informed the company that it was concerned about side effects of its low testosterone product, Nebido. The feds wanted additional data before approving the drug.

While the rest of Indevus' staff scrambled to find the data, Wagner guessed that the company didn't have it -- and he logged on to his company computer and sold 12,500 shares of Indevus stock, and shorted 5,000 more. A couple of days later he shorted another 2,000. Subtle!

When Indevus finally concluded it would have to tell the FDA it did not have the required data, Wagner drafted a press released and assembled a team of pr people to handle calls from investors and the press. He also informed them that until the news was out they were all in possession of insider information and were thus banned from trading Indevus stock.

Unsurprisingly, Indevus' stock dropped 69 percent on the news and fell to $1.26 a share from $4.10 a share. Wagner's ban on trading Indevus ended after two days -- at which point he covered his shorts, pocketed $21,000 in profit, and avoided a loss of $43,000.

In a settlement, Wagner paid $133,000.

(The case is a virtual mirror image of the one alleged against Sequenom (SQNM) vp commercial development Steven Owings. A civil suit claims Owings knew Sequenom's Down Syndrome test data was in trouble so he sold $366,000 in shares a few weeks before the company put out a press release disclosing the fiasco.)

Here's the punchline: Had Indevus' Wagner done the honest thing and sat on his hands -- and his stock -- until January 2009, he could have cashed out at a profit. That month, Endo Pharmaceuticals (ENDP) acquired Indevus for $4.50 a share -- a 10 percent gain on his position the day before Wagner's press release hit the wires. D'oh!

Hat tip to Pharmalot.