Grassley asks SEC to step up probe of drug-secret leaks

WASHINGTON — Congressional analysts have concluded that the purchase by Wall Street brokers of secret information from doctors conducting ongoing drug research may constitute insider trading.

In light of this, the chairman of the Senate Finance Committee has requested that the Securities and Exchange Commission (SEC) move forward with an investigation into the practice, which was first reported by The Seattle Times last August.

Sen. Charles Grassley, R-Iowa, said he wants the SEC to respond to the Congressional Research Service conclusions no later than June 2.

In a letter last week to SEC Chairman Christopher Cox, Grassley said he wants his staff briefed on the status of the SEC's own investigation, which he requested last year in response to The Times' stories.

The Congressional Research Service, a nonpartisan research arm of Congress, analyzed The Times' stories in the context of several key legal cases involving insider trading.

"The Wall Street brokers discussed in The Seattle Times article are reportedly actively seeking inside information and are paying doctors and others who are performing clinical trials to break their confidentiality agreements and disclose information about the trial results before the information is released to the general public," the agency said in a seven-page memo.

"Thus, if the facts in the article are accurate, it is arguable that the described Wall Street analysts may be violating section 10(b) of the Securities Exchange Act," the Congressional Research Service concluded. Section 10(b) is the anti-fraud statute of the act.

The Times found at least 26 cases in which doctors had leaked confidential details of their ongoing drug research to Wall Street firms. In 24 of the 26 cases, the firms issued reports to select clients with detailed information obtained from doctors involved in confidential studies. The reports advised clients whether to buy or sell a drug stock.

The Congressional Research Service finished its report in November 2005. However, Grassley's legal experts wanted time to independently review it, before pressing the SEC last week.

Some Wall Street analysts interviewed by The Times last year said they were doing nothing wrong, and that their job is to gather research for customers.

But citing a 1983 Supreme Court case, Dirks v. SEC, the Congressional Research Service said that it appeared some Wall Street actions chronicled by The Times met the two elements necessary to prove insider trading: The existence of a relationship affording access to insider information, and the unfairness of allowing a corporate insider to take advantage of that information.

A person or firm who violates the Insider Trading Sanctions Act of 1984 could face a civil penalty of up to three times the profit gained or the amount of the loss avoided.

The practices outlined by The Times involved major Wall Street firms such as Citigroup Smith Barney, UBS, and Wachovia Securities, along with top research universities from UCLA to the University of Pennsylvania.

The story has generated reaction among medical schools and research programs, which issued formal reminders that ongoing clinical research is not a commodity.

One of the schools responding quickly to the story was Johns Hopkins Medical Center in Baltimore, one of the largest recipients of federal research dollars.

Hopkins Medicine magazine has followed the issue closely, said associate editor Ramsey Flynn.

"The issue of any doctors selling such information to Wall Street was disconcerting," Flynn said. "One of our concerns was the possible contamination of the quality of the research."

He said Hopkins Medicine plans to publish an in-depth article on the matter and the reaction of the university.

In his letter last week, Grassley wrote that "the integrity of the scientific process itself is compromised by clinical researchers who disclose ... the details of ongoing research."

But his focus is the impact on Wall Street. "When confidential nonpublic information can be bought and sold, it creates an uneven playing field for investors and hurts those who choose to play by the rules," he said.

There has been little momentum at the SEC on the issue so far. And the other figure with both experience and jurisdiction in the area, New York Attorney General Eliot Spitzer, has not addressed the matter.

John Heine, the spokesman for the SEC, said he could not comment on the letter or Cox's plans.

But Grassley's spokeswoman, Jill Kozeny, said the Senate Finance Committee hopes the SEC will schedule the requested update soon.

Seattle broker Paul Latta, research director of McAdams Wright Ragen, does not like the idea of large firms buying special access to drug-trial information.

"I believe it's all perfectly above board," Latta said. However, "the story opened some eyes with brokers and investors who don't have the money to buy that trial information access," he said.

Alicia Mundy: 202-662-7457 or