Once again, Wall Street pros have found a way to get their hands on important, market-moving medical research before the general investingpublic: exploiting a loophole in Regulation FD.
An open back door at the American Society of Hematology Web site allowed early, unauthorized access to research abstracts for the organization's upcoming annual meeting, one of the most closely watched medical events of the year.
Several hedge fund managers, investment banking analysts and a reporter for
-- all privy to the security lapse -- were able to download the abstracts on Nov. 5, one day before they were released to the public. Shares of some of the biotech companies whose drugs are mentioned in the abstracts moved higher on heavy volume.
An official with the American Society of Hematology says the early look at research abstracts was a mistake that will be corrected. In fact, the organization sought this year to avoid selective disclosure of its abstracts, unlike other medical groups that deliberately give its members advance access.
A 24-hour head start may not seem like such a big deal, but these abstracts can be hot investment leads. They contain condensed summaries of drug tests, and they are key indicators of how safe or effective a new drug might be.
Investors play close attention to these abstracts, moving shares of biotech and drug companies higher or lower, depending on their contents.
These policies seem to violate the core tenets of Regulation FD, which is supposed to level the playing field by prohibiting companies from selectively disclosing market-moving information to the Wall Street investment community.
, in a series of articles over the past six months, has shown that medical research organizations
often violate the spirit if not the letter of the law. Groups such as the American Society of ClinicalOncology and the American Heart Association release abstracts first to their members before giving the public access. That strategy often enablesWall Street analysts and fund managers -- who invariably get first crack atthe information -- to make money off their unfair investment advantage.
Medical organizations -- most of which are nonprofit -- can do whatever they please with research abstracts, because Regulation FD doesn't specifically address their existence. Because these medical groups are independent third parties of the companies who fund the drug research -- essentially middlemen -- they are not covered.
To its credit, the American Society of Hematology took steps this year to heed Regulation FD and ensure that its abstracts would be released to everyone at the same time. The plan: Post the abstracts on the organization's Web site on Nov. 6 at 5 p.m. EST.
But unbeknownst to ASH officials, the 2001 abstracts were accessible on Nov. 5 by accessing the Web site file containing the old 2000 abstracts.
"This was a mistake," says Martha Liggett, ASH's executive director. "Out of fairness, we wanted the abstracts released to everyone at the same time. I'm going to talk to our
Web site vendor to make sure this is fixed, and I can promise you that it definitely won't happen again next year."
But this year, investors in the know got a head start. Lehman Brothers biotech analyst Rachel Leheny sent her institutional investing clients a research note, handicapping the ASH abstracts, on Nov. 5.
Early the next day, Nov. 6, Salomon Smith Barney biotech analyst Elise Wang sent out an ASH abstract summary to her clients. The same morning, a hedge fund manager alerted
to the loophole in ASH's Web site.
Remember, ASH didn't make the abstracts public until 5 p.m. EST on Nov. 6.
So, did these lucky investors profit from the advanced notice? It's really hard to determine, but trading activity was higher than normal for some biotech firms on these days.
jumped 4.7% on Nov. 5, then rose another2.4% on Nov. 6. Just over 277,000 shares traded hands on Nov. 5 -- about average for the stock. But trading volume rose three times average to 865,000 shares on Nov. 6.
Immunomedics will be presenting promising data on a new cancer drug at the ASH meeting, and the company's research abstract is getting a lot ofpremeeting buzz. On Nov. 7, the day after ASH released the abstracts, the company's shares rose another 3.6% on volume of more than 1 million shares.
To put this another way, investors armed with a sneak peek at Immunomedics' ASH abstract could have gotten into the stock at a price no higher than $18.99 per share, the closing price on Nov. 5.
By comparison, "ordinary" investors who read the abstract after it was made public could get into the stock only at a price range between $19.44(the Nov. 6 closing price) and $20.14 (the closing price on Nov. 7).
, another biotech firm expected to make a splash at ASH, also rose Nov. 5 and 6 on volume that was slightly higher than average. But shares then fell on Nov. 7.
On Nov. 5,
shares rose 5.7% on higher-than-normal volume.The stock then fell fractionally over the next two days. Celgene will be presenting data on a cancer drug at ASH.
Admittedly, this is a crude way to measure the ways privileged investors may, or may not, be profiting from the nonpublic disclosure ofimportant medical research. But without a doubt, Wall Street insiders clearly have a hunger for this type of information.
One hedge fund manager, when asked about his extracurricular prowling through the ASH research abstracts, pleaded with
to not blow the lid on the secret.
"Don't write a story about this," he asked. "We live for this type of stuff."