Matt Levine writes: The basic puzzle of insider trading is that it is legal to call up corporate executives or government officials and ask them questions, and it is legal to trade stocks, and it is even legal to trade stocks after asking your question and getting an answer, except that sometimes it isn’t. .
An insider trading case against Sanjay Valvani, a portfolio manager and Gordon Johnston, a former FDA official (from 1987 through 1999) who, at the time of the alleged insider trading (2010 to 2011), was vice president of the Generic Drug Trade Association. He was also working as a consultant for Visium, on a retainer of $5,000 a month. Johnston, who has pleaded guilty to the charges, called up an official in the FDA’s Office of Generic Drugs and asked him if it was going to approve some drugs. The official told him, and then he allegedly told Valvani. Then Valvani traded in the stocks of companies that made those drugs, or their brand-name competitors.
So: What makes that illegal? If the FDA official told Johnston about the drug approval process as part of their confidential personal relationship, and then Johnston went off to trade on it (or sell it to Valvani to trade on it), then that would be a crime.
But it’s just obviously not what happened here. Johnston didn’t call the FDA official just to chat about their personal lives and gossip about the drug-approval process. He called the official to ask questions, on behalf of his clients, about prescription drug approval. The official knew that Johnston’s clients — the drug companies who were members of the generic drug trade group — were interested in the FDA’s review of the Abbreviated New Drug Applications for enoxaparin, a generic drug that was also of interest to Valvani.
Of course Johnston encouraged that misunderstanding. He did that using the oldest trick in the book: banter. Johnston’s essential crime here, according to the Securities and Exchange Commission, is that he was too good at asking questions. His questions weren’t just blunt, direct, contextless questions. (Which: would be legal!) They were indirect, leavened with banter, mixed with gossip, preceded by decades of friendship. The FDA official was powerless to resist them. And so he shared with Johnston information that he shouldn’t have, and that Johnston knew he shouldn’t have, but got out of him by trickery.
Does the banter make it a crime? Who knows.
