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Ex-R&D Boss at Down Syndrome Firm Is Now an SEC Stool Pigeon

Elizabeth Dragon, the former R&D chief at troubled biotech Sequenom (SQNM), is cooperating with the SEC in its securities fraud probe of the company, according to court documents. Dragon was indicted and pled guilty to misleading investors in June after it emerged that she lied to investors about the reliability of the company's T21 Down Syndrome test. Dragon's sentencing could have been the end of the criminal investigation into the company, but now that Dragon has agreed to tell the SEC where the bodies are buried, the feds could have a whole new set of hooks in Sequenom.

The lesson here is that there are other deterrents to fraud and insider trading beyond the mere threat of criminal sanctions for the individuals involved. Once an executive is nabbed for lying to shareholders, that person has a strong incentive to guide authorities to other areas of wrongdoing in a company in return for leniency. One bad actor's actions can spread liability far and wide.

Although Sequenom is not widely known, the company could become a household name if can get the T21 test to market, as every pregnant woman in the U.S. would likely demand accurate, non-invasive early detection of Down Syndrome.

In 2009, Sequenom announced it would have to go back to the drawing board on the Down Syndrome test when it discovered its data had been corrupted. The board fired Dragon and its former CEO. In addition, Sequenom's former CFO and vp commercial development and two other unidentified employees were forced out of the company.

Dragon was to have been sentenced for her role in the fiasco on Aug. 25 after she admitted manipulating the data in talks with investors, but the judge canceled the date. Instead, the SEC will now make a report to the court before the end of the year "concerning Dragon's cooperation," according to this ruling.

The question is, What will Dragon tell the SEC about Sequenom's current and former management, and their knowledge of the T21 scandal?

There's plenty for Dragon and the feds to chat about: A civil lawsuit brought by shareholders has accused former vp commercial development Steven Owings of a "suspiciously timed" sale of $366,000 of Sequenom shares a month before the company confessed it had screwed up its T21 data. That suit also names former CEO Harry Stylli, former CFO Paul Harwan and Dragon as defendants, in addition to three current members of management and the company's board.

That suit is currently stalled in federal court. The SEC is also probing Sequenom over its 2009 acquisition of Exact Sciences.

Looks like the folks who are the subject of the SEC-Dragon talks will face a stressful holiday season.

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Image by Flickr user mahalie, CC 2.0