Insider Views Suicide Over Brothers’ Scheme That Netted $200,000

By David Voreacos
Nov. 13 (Bloomberg) -- 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 Inc., 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,” Jenny Durkan,
the U.S. attorney in Seattle, said in an interview. “Both
brothers were promising.”
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.

Health Industry

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 Inc. pilot, a
film producer and a member of Major League Baseball’s Hall of
Fame have been charged or sued by regulators. It has touched the
Food and Drug Administration and large health-care companies
such as Bristol-Myers Squibb Co. and Abbott Laboratories.
“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 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 SEC or
charged since 2008 with passing or receiving insider-trading
tips involving pharmaceutical, biotechnology or other health-
care stocks. While the number of insider-trading cases in the
technology industry has been roughly the same during that time,
many of those were intertwined with the case of Raj Rajaratnam,
the billionaire hedge-fund manager serving an 11-year prison
sentence.

Notable Corruption

What’s notable about health-care corruption is its breadth.
It’s a part of what could be termed the democratization of
insider trading. While once it seemed to be the domain of big
players like arbitrager Ivan Boesky and personified by the
character Gordon Gekko in the movie “Wall Street,” insider
trading now is often conducted by everyday, otherwise law-
abiding people looking to make thousands, not millions, of
dollars.
Among the cases: husbands stealing information from wives,
fraternity brothers conspiring and a 62-year-old attorney, Dean
Goetz, making trades on information he overheard from his
daughter. She was a lawyer visiting home for the holidays while
she worked on the Abbott acquisition of Advanced Medical Optics
Inc. Goetz, who was sued by the SEC, settled without admitting
or denying wrongdoing.

Biotech Vulnerable

“The biotech industry is particularly vulnerable to
insider trading schemes because a successful or unsuccessful
clinical trial can cause such sharp market movements,” Durkan,
the top federal prosecutor in Seattle, said in an interview.
And there is also this:
“The health-care sector of the hedge fund industry is a
very small world where people work closely on ideas.”
That’s what one health-care inside trader turned
confidential informant told the FBI in an agent’s interview
summary obtained by Bloomberg News.
The same informant, in another interview, said he was once
on a golf course with three doctors whose beepers all went off
at the same moment with the same inside tip.
Among the health-care cases:
-- An FDA chemist, Cheng Yi Liang, had access to the
agency’s internal tracking system for new drug applications, and
could tell which would succeed or fail. He pleaded guilty to
trading on more than 25 companies over almost five years,
admitting he made profit or avoided losses of $3.78 million. He
is serving five years in prison.

Baltimore Orioles

-- Eddie Murray, the Hall of Famer, was sued by the U.S.
Securities and Exchange Commission, which alleged his former
Baltimore Orioles teammate, Doug DeCinces, tipped him about the
acquisition of Advanced Medical Optics in 2009. The agency said
DeCinces heard from former CEO James V. Mazzo, a close friend
and neighbor, that Abbott Park, Illinois-based Abbott would buy
the company. Murray, DeCinces and two other men paid $3.3
million to settle without admitting liability. Mazzo and another
defendant denied any wrongdoing. Their case is pending.
-- Business consultant Brett A. Cohen and his uncle, David
V. Myers, were charged with insider trading in 2009 on two
biotechnology companies. Cohen received and sent e-mails,
including some to a fraternity brother, using coded words that
referred to the movie “Wall Street,” such as “blue
horseshoe.” Cohen and Myers pleaded guilty and received three
years’ probation.

Fund Manager

-- Former hedge fund manager Stephen R. Goldfield settled an
SEC lawsuit claiming he made $14 million by trading on inside
information before the 2007 takeover of MedImmune Inc. by
AstraZeneca Plc. The SEC claimed a former Merck & Co. executive,
James W. Self Jr., tipped Goldfield after learning on his job
that MedImmune was for sale. Self also settled. Neither man
admitted wrongdoing.
-- Robert Ramnarine was a Bristol-Myers executive who
performed due diligence on three companies targeted for
acquisition. U.S. prosecutors in New Jersey charged him with
making $311,361 by buying stock options in the companies. His
lawyer is negotiating a plea agreement, court papers show.
-- Former investment banker Igor Poteroba, who worked in UBS
AG’s health-care group, pleaded guilty to tipping a friend about
pending acquisitions. Poteroba, who admitted to a conspiracy
spanning five years, got 22 months in prison.

Destroy People

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 admired his brother James, said Allen Ressler, a
Seattle attorney who represented Zishen Fan.
“It’s a traditional Chinese family,” Ressler said. “He
looked up to his older brother, and his older brother was like a
father figure to him. He relied on his counsel, much to his
chagrin in this case.”
After high school, Zishen Fan attended college in Beijing
and went to the U.S. 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, Arizona.

Political Asylum

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 Whitehouse Station, New Jersey-based Merck in
San Francisco and Eli Lilly & Co. in Philadelphia. He moved to
California in 2005, working in sales for Becton, Dickinson &
Co., Roche Holding AG and Insulet Corp., Ressler said.
Zishen was divorced in 2008 after 10 years of marriage; he
and his wife had no children. He was earning about $96,000 a
year at the time for Insulet, according to divorce records.
Those records stated that he owed $1.05 million on two
properties worth $950,000. Zishen’s real estate loans of
$520,000 and $400,000 went into foreclosure, along with a home
equity loan of $75,000, according to a government court filing.

James Fan

James Fan (born Zizhong Fan) and his wife trained as
physicians in China, where the pay was low, said James Fan’s
attorney in Los Angeles, Adam Braun, a former federal
prosecutor. 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,” Braun said.
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, Washington, as a senior statistical programmer. His job
was to convert raw data from clinical trials into statistics
measuring testing on drugs.

Clinical Trials

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. The results would
underpin the company’s FDA application for its first marketed
product. Seattle Genetics developed the drug with Takeda
Pharmaceutical Co. of Osaka, Japan. Seattle Genetics would
handle marketing in the U.S. and Canada while Takeda had the
other worldwide rights.
The drug, also known as brentuximab vedotin, uses an
antibody to bind with a protein on the surface of lymphoma
cells, then blasts them with a cancer-killing chemical. It
avoids the side effects of chemotherapy by unleashing the cell-
killing agent only when it reaches the tumor, avoiding release
in the bloodstream or to healthy tissue.
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.

Seattle Genetics

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 a
Federal Bureau of Investigation 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 Corp.
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.

Cancer Drug

On Monday, 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 Omaha, Nebraska-based 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.
“TD Ameritrade utilizes a variety of risk-management tools
and surveillance methodologies to identify potentially
problematic activity,” Kristin Petrick, a company spokeswoman,
said in an e-mail. “We do so to help protect our clients and
comply with relevant laws and regulations. It is our policy to
not comment on the specifics of these methods.”
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.

Eleven Days

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. SEC attorney Jennifer Lee told Zishen
Fan that she was taping the call. Fan confirmed he was also
known as Brandon.
“How did you become familiar with Seattle Genetics?” Lee
asked.
“Web search,” Fan said. “I’m interested in, you know,
medical biotech pharmaceuticals.”
“Okay,” Lee said. “And do you know anyone who has worked
at Seattle Genetics?”
“No,” Fan said.

Telephone Calls

Minutes later, James Fan interrupted his own call with the
SEC lawyers and said he would call right back. Over the next two
hours, the brothers talked four times by phone. When James Fan
spoke again to the SEC, he denied knowing or being related to
Zishen Fan. He refused to give the names of his parents. When
asked about SGN-35, he ended the call.
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 D. Schumacher filed in court by the SEC.
Fan went to Vancouver and flew from there to China. A week
later, he returned to Seattle on a flight from Beijing.

Trading Scheme

On Jan. 19, the SEC sued, filing a complaint that laid out
the insider trading scheme. The agency said they made profits of
$803,000 and sought to freeze the Fans’ assets. The agency cited
the Fans’ lies to the SEC and attempts to move money to China.
It included hundreds of pages of documents, such as trading
records from TD Ameritrade.
A federal judge in Seattle froze the account that day.
James Fan never returned to Seattle Genetics, which later
terminated him, Braun said.
As a legal permanent resident with a green card, James Fan
was concerned a criminal investigation and conviction would lead
to his deportation, Braun said. Fan, whose e-mail address was
daddycomehome@yahoo.com, 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.

‘Some Facts’

“We laid out some facts that would tend to suggest the
case was not as clean as they thought,” Braun said.
Braun said that in their phone calls, the brothers may have
discussed what was already in the public domain about Seattle
Genetics, suggesting they didn’t act on inside information.
Zishen Fan could have made educated purchases based on the mix
of information in the public. He also had previously traded in
pharmaceutical stocks, Braun said. The lies to the SEC attorneys
at the start of the probe were problematic, Braun conceded.
“They were nervous and they lied,” Braun said. “We
obviously had to try to explain that away. They were in a
precarious immigration situation and they were scared. We took
the position that James didn’t know that his brother was
trading.”

Fan’s Children

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 said he told the government.
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.
As prosecutors built their case, James Fan was unable to
find work in Seattle. He landed a job as an analyst and
statistical programmer with Novartis AG in New Jersey. He worked
there for about two weeks, staying in a hotel and flying home on
weekends, Braun said.
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, Washington. They didn’t know Fan was
working in New Jersey.

Distraught Wife

Fan’s distraught wife called Braun, who phoned a prosecutor
about 7 a.m. to complain. Braun said agents should have let Fan
surrender rather than arrest him. Braun promised to bring his
client to court the next day for his initial appearance and bail
hearing. Braun spoke with Fan at his job.
“He was scared,” Braun said. “He said, ‘Should I go back
to the hotel or not? Will I be arrested there? Should I just
leave my stuff and come home?’ I said, ‘Chances are they’re not
going to be looking for you there, at least not immediately.’”
Braun talked to Fan several times that day, discussing
trial strategy, the hiring of experts and the court hearing. Fan
told Braun he would reserve a flight out of Newark. Fan went to
the airport without making a flight reservation for that day.

School Friend

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, Braun said. The friend then
contacted police from the Port Authority of New York and New
Jersey, which runs the airport, 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 local
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 in filing charges and seeking to arrest Fan
rather than let him surrender.

‘Strong Case’

“There is always uncertainty in litigation, but this was a
very strong case,” Durkan 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.
“We had several indications that he was a flight risk,”
Durkan said. “He had already gone to China through Canada. He
tried to move money offshore. He had ties to China. He moved,
and we had been given no indication.”
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.
“He was overwhelmed,” Ressler said.

‘Unforeseen Circumstances’

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 “descheduled”
because of “unforeseen circumstances.”
Fan pleaded guilty on July 12, 2011, admitting his brother
gave him material, non-public information about SGN-35. Fan
admitted buying stock and options in the TD Ameritrade account
in his father’s name.
Before sentencing, Ressler told the judge that James Fan
bore more blame, saying he provided “the bulk of the funds used
for insider trading” and was “obviously the only person” who
could know inside information at Seattle Genetics.
Zishen Fan followed the lead of his brother, whom he
“admired all of his life,” Ressler said in a sentencing memo.
“He admits that he should have realized that what his brother
was asking him to do was criminal and regrets that he allowed
himself to be used and that he became involved.”
The case and suicide put “an incredible strain” on Fan,
Ressler wrote. “Zishen, as his tradition dictates, has taken on
the responsibility of providing financial and emotional
support” to his widowed sister-in-law and her children, and to
his parents in China.

‘Excruciating Pain’

In a letter to the court, James Fan’s widow, Yuan Ma, said
her husband’s death “has brought excruciating pain to me and my
two children. While on the edge of collapsing and emotionally
traumatized, I am struggling with my work, my emotions and
taking care of the kids all by myself.”
Braun said James Fan never profited from the trades.
“If anything, James would have done this to help his
brother out financially, given the brother’s financial
troubles,” Braun said. “There’s no allegation that James
profited directly or indirectly from the trades. When the money
was returned to James, it was just in the amount he loaned.”
That assertion isn’t part of the court record.

Calculated Gain

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.
In a memo to the judge, prosecutors sought a two-year
prison term, saying Fan “willingly encouraged and exploited his
brother’s position with Seattle Genetics” to solve his own
financial difficulties.
Prosecutors also disputed Fan’s claim that he was a minor
player, saying he had a “greater and clearer motive” than his
brother, and he made all the trades in the TD Ameritrade account
he controlled.
U.S. District Judge Marsha Pechman agreed with the
government’s expert on the gain, saying Fan made $207,316. She
sentenced Fan on Oct. 7, 2011, to 18 months in prison. He is
serving his term at a facility in Taft, California, about
120 miles northwest of Los Angeles.
Fan declined an interview request.
Ressler said he has spoken with Fan in prison.
“He says he’s enduring it,” Ressler said.