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U.S. rekindles insider trading push

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(Reuters) — A portfolio manager at hedge fund Visium Asset Management LP was criminally charged on Wednesday with insider trading, in one of the biggest such cases since a 2014 court ruling made it harder for U.S. prosecutors to pursue them.

U.S. Attorney Preet Bharara in Manhattan accused Sanjay Valvani of fraudulently making at least $25 million off tips from former U.S. Food and Drug Administration official Gordon Johnston about that agency's approval of pending generic drug applications.

Valvani also passed some of these tips to Christopher Plaford, then a Visium portfolio manager, who made his own illegal trades, prosecutors said.

"Sadly these are schemes we see time and time again, where lies and use of non-public information profits those conducting the crimes, and everyday investors lose out," FBI Assistant Director-in-Charge Diego Rodriguez said in a statement.

The government also accused Plaford and Stefan Lumiere, another former Visium portfolio manager, of fraudulently inflating the value and liquidity of a fund they oversaw by getting "sham" price quotations from brokers, in an effort to prevent investors from demanding their money back.

“An Innocent Man”

Valvani, 44, of Brooklyn, New York, was charged with five counts including securities fraud, wire fraud and conspiracy. Lumiere, 45, of New York, was charged with securities fraud, wire fraud and conspiracy.

Both were arrested on Wednesday and expected to appear that day in the federal court in Manhattan.

Plaford, 38, of Bedford, New York, and Johnston, 64, of Olney, Maryland, pleaded guilty earlier this month to related charges and are cooperating with prosecutors.

The U.S. Securities and Exchange Commission filed civil charges against all four defendants.

"Sanjay Valvani is an innocent man whose investment decisions were always based on rigorous and entirely appropriate research and analysis," his lawyer Barry Berke said in a statement.

Berke also accused Bharara of "stretching the facts and law to try to transform entirely innocent trading decisions into a crime."

Lumiere's lawyer Eric Creizman and Plaford's lawyer David Smith declined to comment. Visium and a lawyer for Johnston did not immediately respond to requests for comment.

Visium is based in New York, and was not charged.

Bharara has won dozens of insider trading convictions over the last several years, including of hedge fund manager Raj Rajaratnam and Steven A. Cohen's firm SAC Capital Advisors.

But he was dealt a big setback when the federal appeals court in New York in December 2014 voided his convictions of hedge fund managers Todd Newman and Anthony Chiasson.

That court said that to win convictions, prosecutors needed to show that traders knew the people who provided inside tips received something consequential in exchange.

A Momenta Tip

Founded in 2005 by Jason Gottlieb, who has a medical degree, Visium oversees about $7 billion of assets. Last month, The Wall Street Journal said investors asked to redeem about $1.5 billion after news of the federal probes surfaced.

The Visium Global multi-strategy fund gained 10.2% in 2015, and the Visium Balanced healthcare fund rose 5.6%.

Valvani's alleged scheme ran from 2005 to 2011, centered on "political intelligence" that Johnston, working as a Visium consultant, got from a former colleague at the FDA, where he was once deputy director of the Office of Generic Drugs.

According to court papers, Visium paid Johnston hundreds of thousands of dollars over the years, but Valvani asked its chief financial officer in a Jan. 6, 2010 email to offer a raise.

Johnston "is without question the most valuable consultant I've ever worked with and I'm pushing to reinforce the value of the relationship and encourage him to continue to go above and beyond for our team," Valvani allegedly wrote.

Prosecutors said he did just that, sending tips about the FDA approval process for the first generic equivalent to Sanofi SA's Lovenox, for treating deep vein thrombosis.

According to court papers, Valvani made $25 million after a generic from Momenta Pharmaceuticals Inc. won approval in July 2010, causing that stock to rise 82% in one day.

Valvani soon sold his Momenta stock, and closed out bets that Sanofi's stock would fall because of the new competition, prosecutors said.

The SEC said Valvani reaped another $7 million by later selling Momenta short, based on tips that Watson Pharmaceuticals Inc. might also win approval for a Lovenox generic.

These trades helped Valvani receive bonuses topping $11.5 million in 2010 and $10.5 million in 2011, dwarfing his $2.5 million bonus in 2009, the SEC said.

Prosecutors said Valvani called Johnston in January 2011 to end their relationship, "in the wake of news reports of insider trading investigations."