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How One MD's Illegal Behavior Could Benefit Investors


Why did a respected neurology doctor turn the corner on ethical behavior and start selling information on clinical trials in which he was involved? And how can it benefit the average investor?

When I was training to become a neurologist in the mid 1970s, Sid Gilman, MD, head of neurology at the University of Michigan**, was a respected figure. His name was spoken almost in hushed tones. Those who were accepted into his training program were considered special or, at least, fortunate. Gilman virtually couldn’t do anything wrong.

Until he did. About 10 years ago, when Gilman was in his 70s, he turned the corner on ethical behavior. He started selling information on clinical trials in which he was involved. This information helped traders buy or sell the market prematurely before others had the same data. In this way, these privileged individuals could make money because they had an edge that others didn’t: insider information.

In fact, data from Gilman is believed to have been the reason that SAC Capital, a hedge fund, was able to sell Elan and Wyeth shares plus short the stock two weeks before everyone else dumped the two. This inside information resulted in $275 million in revenue for the Stephen A Cohen (SAC) Company before the negative company news became public.

What did Gilman get in return? A measly $1,000 an hour.

Finally, when he was identified as the source of said information, he was discredited and lost his position at the University of Michigan. He had to pay back to the government at least some of the money he had accepted in exchange for front running information. In order to save his skin, he gave the feds evidence they needed to bring a case against a trader from SAC Capital who was the recipient of some of his information.

Though there are many reasons why a respected figure might do what Gilman did, the most likely is that he needed money. This reportedly is not the case. Thereby, left in a vacuum without a motive, I can’t help but wonder if Gilman, an expert in Alzheimer’s research, may have been a victim of a little recognized variant of the very subject he was studying.

This is why. Natalie Denburg, PhD, and colleagues at the University of Iowa and the University of Southern California in Los Angeles showed that among their study subjects, an older subset (35% to 40%) exhibited a decision-making impairment even though they had otherwise intact cognitive functioning. This group persisted in choosing high immediate gains, but larger future losses over time — the reverse of their age comparable colleagues and the younger study group.

This behavior sounds as though it is compatible with Gilman’s choices. Though he seemed normal (like Denburg’s subset of subjects), he was choosing an immediate monetary reward in spite of the fact that he should have known he could lose big later if he was found out. For more detailed information on Denburg’s research please see Aging and Investment Decisions and Swindled Seniors: A specific brain abnormality may be the cause.

If this did happen to Gilman, this accident of nature could contribute to one of the most important benefits to investors in years: exposure of a high-profile, insider-trading case could, in turn, diminish this activity in the U.S.

Important information about a company should be available to all market participants at the same time in order to provide a level playing field, otherwise the market is unfair, as when insider trading occurs. As a result, SAC Capital, or some other company or individual, can benefit at the expense of other shareholders due to knowledge that is not available to the public.

(For more regarding this concept please see the interview of Eugene F. Fama, a Nobel Prize Winner in 2013 and a Professor of Finance at the University of Chicago Booth School of Business. Fama won an economic Nobel Prize in 2013.)

I, for one, would be glad to see insider trading defunct or at least markedly diminished. Surely, this would help most investors. The average investor is the one who never seeks or is given the inside scoop and therefore has to trade stock without the illegal behavior from which few benefit.

**Sid Gilman, MD, was appointed head of neurology at the University of Michigan in 1977.

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