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Insider trading: What it is and how to avoid it

Medical Economics JournalJanuary 25, 2019 edition
Volume 96
Issue 2

Physicians engaging with publicly traded companies, such as serving on boards or as expert advisers, should pay particular attention to the rules around their agreements.

Doctors often have opportunities to gain insider knowledge about new drugs, devices, and other healthcare innovations being developed by publicly traded companies. A doctor may acquire such information by sitting on a firm’s board of directors, serving as an expert consultant, or helping to run clinical trials whose outcomes can affect the value of a company’s stock. 

Insider trading occurs when an individual possessing such information makes investment decisions based on it, explains Michael S. Sinha, MD, JD, a research fellow in therapeutic science at the Harvard-MIT Center for Regulatory Science at Harvard Medical School. It’s important to know how to avoid it.   

Physicians need to proceed with care when they acquire inside intelligence, that is, material information that could alter a healthcare company’s share price and that is not publicly available. The law prohibits a clinician with access to such inside information from buying or selling stock based on such information and keep it strictly to themselves.

Temporary insiders are still insiders

Importantly, the law considers consultants who gain access to inside information during a temporary position with a company, such as clinical researchers, to be insiders, according to a recent JAMA Internal Medicine article whose lead author is Aaron S. Kesselheim, MD, JD, an associate professor of medicine at Harvard Medical School and director of the Program on Regulation, Therapeutics, and Law at Brigham and Women’s Hospital. “Temporary insiders are subject to the same rules as company management and full-time employees,” the authors note. 

Pitfalls to avoid

There are two basic traps that people fall into with insider trading, explains Steven W. Schuster, JD, a partner at McLaughlin & Stearn, a New York-based law firm. 

The first trap consists of an officer, director, or employee of a company taking advantage of knowledge they have obtained through their position with the firm. For example, a physician might observe that a new drug they have been given to test is either a great success or an utter failure. 

These results amount to material inside information and trading on it would be illegal, says Schuster. Or a doctor might know that a certain drug or device is about to be approved or disapproved by the FDA. These kinds of situations are what people traditionally think of as inside trading, Schuster explains.

The second trap involves a person with inside information tipping off somebody else who then trades in the shares, says Schuster. 

In some cases, the person receiving inside information will share their monetary gains with the person providing the tip. However, such sharing of the illegal profits does not have to occur for insider trading to have taken place, says Schuster. 

Insider trading can result in both civil and criminal charges. Often, people convicted of insider trading are required to return any profits accrued in the 12 months prior to their prosecution, wrote Kesselheim’s team. The penalties depend upon the extent of the transgression and the amount of illegal gains, and can also include imprisonment, Sinha explains. 

What’s more, a person need not actually profit from insider trading in order to be guilty of committing securities fraud, and to be liable to prosecution, according to Kesselheim. 

Ways to avoid insider trading

Read the fine print

As described above, physicians often engage with publicly traded companies in various ways, such as serving on boards or as expert advisers. “In these cases, the physician is almost always asked to sign confidentiality or nondisclosure agreements before serving in such roles. Carefully read and then reread the terms of such agreements before you sign them,” says Sinha.

If you don’t understand aspects of the agreements, seek immediate clarification from a representative of the company asking you to sign, Sinha adds. 

Before buying or selling stock, consider the source of the information prompting the trade 

When a doctor receives information about a public company through their professional activities, they have an obligation to consider the source of the information and whether it has already been made public before trading on it, says Sinha. 

“There is a big difference between, ‘I read it in Bloomberg Businessweek’ and ‘I heard it during a company board meeting,’” he says. When in doubt, he advises, do not trade in a stock, even if the information came to you from family or friends.  

The rules apply everywhere and anywhere

Schuster gives this example: A doctor might socialize with an old friend who works for Disney, and the friend might mention that visitors to the theme parks are up 30 percent for the current year. 

The doctor must determine if that information has already been made public or not.  If the information is not yet widely available, the friend may expect the doctor to refrain from trading on the basis of it. 

If the doctor did buy or sell Disney stock after that conversation, both the doctor and the friend may have broken the law. 

“Information received in a social setting is a gray area, but when in doubt, don’t trade on it,” says Schuster. The friend may not be guilty if he expected the visiting physician to keep the comments on attendance confidential. 

Do trade freely on insights and ideas you develop yourself 

A physician may have extensive knowledge of a particular illness or a certain type of surgery. He or she may then read that a certain company is about to invest heavily in an approach that the doctor thinks  is going to work or is not going to work, says Schuster. In that case, the physician is free to trade and to advise others to trade in the stock, he says. “You’re using your knowledge and public information. There’s no expectation of confidentiality.” 

A doctor would also have the green light to trade, he says, based on clinical observations, insights and intuitions. “Say you’re using a device and it’s just not working well. Or maybe you observe how patients react to a new medication. Trade on it. Tell people about it,” says Schuster. “You’re not getting those ideas from anyone at the company.”   

But if a doctor learns about the underperforming device or the fantastic new drug from someone who has a relationship with the company making the device or drug, he or she must not trade on that information or reveal it to anyone else, says Schuster.

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