NEWARK, N.J. — On April 14, 2011, James Fan stood on a parking-garage landing at Newark Liberty International Airport, a cheer-you-up letter from his young son in his pants pocket, the prospect of a four-story leap facing him.
Fan, 39, had been charged a day earlier with insider trading based on his knowledge of Seattle Genetics, a health-care company where he was manager of clinical programming. Also charged: his younger brother, Zishen, who was scheduled to take the oath of U.S. citizenship a month later.
The total take, a judge later determined, was about $200,000. James Fan was trying to help his brother, who had found himself deep under water after the California real-estate market collapsed in 2008, prosecutors said later.
“The Fan case is such a cautionary tale,” said Jenny Durkan, the U.S. attorney in Seattle. “Both brothers were promising.”
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The markets are awash in insider trading, and the health-care industry has been particularly hard-hit. Health-care businesses offer illegal traders more opportunities to profit than the finance and technology sectors that have traditionally been prime victims of insiders who leaked confidential data about earnings or deals.
Health companies can live or die on the results of drug trials, which stretch for years before regulators make decisions that can trigger hundreds of millions of dollars in profits or losses. And the industry has undergone significant consolidation, leading to several multibillion-dollar mergers.
The lineup of accused health-industry insider traders illustrates how widespread the illegal practice has become: chief executive officers, hedge-fund traders, bankers, lawyers, doctors, accountants, a retired Delta Air Lines pilot, a film producer and a member of Major League Baseball’s Hall of Fame have been charged or sued by regulators.
“Health care is particularly attractive to criminals because so much turns on the government regulatory approval,” said Rod Rosenstein, the U.S. attorney for Maryland, whose office helped prosecute the Food and Drug Administration (FDA) case. “If you have a pending application for a new drug, the difference between yes and no on approvals can be tens or hundreds of millions of dollars.”
The Fans are among at least 75 people sued by the Securities and Exchange Commission (SEC) or charged since 2008 with passing or receiving insider-trading tips involving pharmaceutical, biotechnology or other health care stocks.
One health-care inside trader turned informant told the FBI he was once on a golf course with three doctors whose beepers all went off at the same moment with the same inside tip.
The Fan story illustrates how health-care insiders abuse privileged information for profit, while the aftermath of investigations can destroy people and careers. It also shows how regulators and prosecutors — and, in this case, an online brokerage — acted on red flags.
James Fan was born in 1971 in Beijing, a year before his brother, Zishen. Their parents later divorced.
Zishen Fan attended college in Beijing and went to the United States with his wife in 1998. He earned a master’s of business administration degree at American Graduate School of International Management, now known as Thunderbird School of Global Management, based in Glendale, Ariz.
In 2001, he applied for political asylum in the U.S. as a practitioner of Falun Gong, according to court papers filed by prosecutors. Falun Gong is a spiritual discipline that was subject to Chinese government repression. The U.S. granted that petition in 2005.
Zishen Fan moved around the U.S., working as a sales representative for Merck in San Francisco and Eli Lilly in Philadelphia. He moved to California in 2005, working in sales for Becton, Dickinson, Roche Holding and Insulet, Ressler said.
Zishen was divorced in 2008 after 10 years of marriage. He was earning about $96,000 a year for Insulet, according to divorce records.
James Fan (born Zizhong Fan) and his wife trained as physicians in China. He never practiced medicine and moved to the U.S. in 1999, a year after his brother.
“When he came to the U.S., he wasn’t able to practice medicine, so he went into medical research,” said James Fan’s attorney Adam Braun, a former federal prosecutor.
James Fan worked for several years at MedImmune in Maryland. He moved to Seattle to improve the respiratory health of his two young sons, who both have severe asthma, Braun said.
“James was a quiet, sort of shy and more passive person than his brother,” Braun said. “His brother is very charismatic and assertive. He’s a lot more social and Americanized.”
In July 2008, James Fan began work at Seattle Genetics in Bothell as a senior statistical programmer. His job was to convert raw data from clinical trials into statistics measuring testing on drugs.
By 2010, he made about $110,000 a year and led a group of programmers who analyzed the data from a pair of clinical trials on the company’s flagship drug SGN-35, also known as brentuximab vedotin. The results would underpin the company’s FDA application for its first marketed product. Seattle Genetics developed the drug with Takeda Pharmaceutical of Osaka, Japan.
In 2010, the company ran one clinical trial involving 102 patients for whom prior therapy didn’t work and another with 58 patients. The trials would be a success, the company said, if 20 percent of patients showed complete or partial remission of their disease. James Fan learned in July 2010 that the raw data showed progress for a large majority of the patients.
Because of the trials, Seattle Genetics began a blackout period on employees trading company securities starting June 22. A day earlier, James Fan cashed $50,800 in certificates of deposit and put it in his personal bank account, according to an FBI complaint. On June 30, he wired $50,000 from his online brokerage account to his bank account.
Nine days later, James Fan wired $100,000 to an account in China in the name of his mother, according to the FBI complaint. Fan moved that money to an online TD Ameritrade Holding account in the name of his father in China. James Fan intended that money as a loan for Zishen, who also moved money into the account, according to Braun.
On Aug. 24, Zishen Fan began buying options to purchase shares of Seattle Genetics at $12.50 per share by Oct. 16. Those options purchases, in the account in his father’s name, continued until Sept. 24, when he added 12,650 shares. Over a month, the brothers spent $514,314 on stock and options purchases of Seattle Genetics.
On Sept. 27, Seattle Genetics announced that SGN-35 cut tumor size by at least half for 75 percent of the 102- patient group. Shares closed at $14.30, a rise of almost 18 percent. Zishen Fan began exercising the options and selling shares.
The activity aroused suspicions at TD Ameritrade, which filed a complaint about possible insider trading on Oct. 27 with the SEC and the Financial Crimes Enforcement Network, a U.S. Treasury Department bureau that fights money laundering.
The Options Regulatory Surveillance Authority, or ORSA, which monitors trading for the Chicago Board Options Exchange and other exchanges, also flagged the account and alerted the SEC on Dec. 13.
ORSA found that on 11 days, Fan’s buys ranged from 40 percent to 92 percent of all such contracts.
SEC lawyers in San Francisco, who also cover Seattle, took up the case. They called the Fan brothers within minutes of each other on Jan. 13, 2011.
Later that day, Zishen transferred $50,000 from his father’s brokerage account to a bank account in his father’s name. The next day, Zishen tried to wire $500,000 from the brokerage account to an account in China, telling TD Ameritrade it was for “purchasing retirement property.” TD Ameritrade refused the request “due to a lack of signed authorization for purposes of foreign transfers,” according to the FBI complaint.
James Fan told his boss at Seattle Genetics “he was leaving for China that day and would not return to work for at least four weeks and potentially longer,” citing “an urgent family emergency,” according to a statement of company General Counsel Kirk Schumacher filed in court by the SEC.
Fan went to Vancouver, then flew to China. A week later, he returned to Seattle on a flight from Beijing.
On Jan. 19, the SEC sued, filing a complaint that laid out the insider-trading scheme.
A federal judge in Seattle froze the account that day.
James Fan never returned to Seattle Genetics, which later terminated him.
As a legal permanent resident with a green card, James Fan was concerned a criminal investigation and conviction would lead to his deportation. Fan, whose email address was firstname.lastname@example.org, said he feared separation from his two young sons, both U.S. citizens, the lawyer said. They were ages 3 and 7 at the time.
Braun said he and Zishen Fan’s lawyer met on Feb. 16 with a federal prosecutor, an FBI agent and an SEC attorney to try to persuade them to punish the Fans through the regulatory lawsuit and not by criminal prosecution. The defense lawyers offered explanations for the evidence.
At the meeting, Braun stressed to the prosecutors the importance of Fan’s children to him, he said. “He couldn’t face not being a part of his kids’ lives.”
Braun also argued that Fan could be trusted to surrender because he returned from China even as he knew about the SEC lawsuit and the criminal investigation.
Braun said he asked prosecutors to let Fan surrender to the FBI if he was charged rather than undergo arrest in front of his wife and children. His requests were in vain.
On April 13, prosecutors filed a criminal complaint in federal court in Seattle. The Fans’ charges constituted the first criminal insider-trading case for federal prosecutors in Western Washington.
The next morning, FBI agents went to arrest Fan at his rental home in Mill Creek. They didn’t know Fan was working in New Jersey.
Braun talked to Fan several times that day. Fan told Braun he would reserve a flight out of Newark. Fan went to the airport without making a reservation.
He spoke that afternoon with a high-school friend from China who lived in New Jersey. The friend grew alarmed and went to the airport to find Fan. The friend contacted police and said Fan was suicidal and at a parking garage.
When police arrived, they found Fan’s body beside the garage. They determined he jumped from a fourth-floor landing, said Port Authority spokesman Al Della Fave. They also found his rental car in the garage. He was pronounced dead at a hospital.
“Until the very last minute, he was probably deciding whether to fly,” Braun said. “In the end, he had a letter from one of his boys in his pocket and a picture of his wife. They had sent him a letter when he was in New Jersey to kind of perk him up.”
Durkan, the U.S. attorney in Seattle, said the government acted correctly.
“There is always uncertainty in litigation, but this was a very strong case,” she said. “We have no doubt the jury would have reached the right conclusion.”
Durkan said prosecutors considered the consequences of Fan’s immigration status. They also concluded he couldn’t be trusted to surrender, she said.
Durkan said that while she regrets the suicide, the decision to arrest him was correct. “Nobody wanted that outcome,” Durkan said. “But at the end of the day, there is only one person who is responsible for that outcome, and that’s Mr. Fan.”
The day after the suicide, Zishen Fan appeared in court.
Zishen Fan, a permanent legal resident, was at the end of a years-long process seeking U.S. citizenship. He needed only to undergo the oath of citizenship ceremony. On May 16, 2011, the U.S. Citizenship and Immigration Services notified Fan by mail that his oath ceremony, set for May 26, had been canceled.
Fan pleaded guilty on July 12, 2011, admitting his brother gave him material, nonpublic information about SGN-35.
Fan admitted buying stock and options in the TD Ameritrade account in his father’s name.
In calculating the money made by the brothers, the government’s expert fixed that gain at $207,316, while a defense expert put it at $110,636. Both the SEC and federal prosecutors initially said it was $803,000.
U.S. District Judge Marsha Pechman sentenced Fan on Oct. 7, 2011, to 18 months in prison.
He is serving his term at a facility in Taft, Calif., about 120 miles northwest of Los Angeles.
Fan declined an interview request.