Ex-Merck employee charged in biotech's latest insider trading scheme

This summer, as Merck ($MRK) inched closer and closer to its $3.9 billion buyout of Idenix Pharmaceuticals, one of the company's employees tipped off a friend that a deal was imminent, federal prosecutors say. With that information, the pair made hundreds of thousands of dollars on insider trades, according to the SEC, the latest scandal for an industry increasingly vulnerable to such manipulation.

The feds have charged Zachary Zwerko, a former Merck financial analyst, with one count of conspiracy to commit securities fraud, saying he used his access to the pharma giant's internal memos and directories to fuel lucrative, illegal trades.

According to court documents, when Zwerko got word that Merck was negotiating with Idenix, he told a former business school classmate to buy into the biotech. In June, when Merck made official its $24.50-per-share acquisition, his friend then sold his stake, making a nice windfall, the SEC said.

The pair pulled the same move in 2012, according to prosecutors. Ardea Biosciences, maker of a promising gout therapy, was courting offers from numerous big drugmakers, including Merck. Zwerko passed that information on to his friend, and, when AstraZeneca ($AZN) later won the bidding war with a $1.3 billion cash offer, that friend reaped some illicit gains, feds say.

The trader's profits totaled at least $722,000, according to the SEC, and, if convicted, Zwerko could face 5 years in prison and a $250,000 fine. Prosecutors are also seeking to permanently ban him from trading stocks.

The charges are similar those filed against former Bristol-Myers Squibb ($BMY) executive Robert Ramnarine, who is serving a year in federal prison for tapping nonpublic information to inform bets on Amylin Pharmaceuticals and ZymoGenetics, companies his firm later stepped in to acquire at a premium. He netted more than $300,000 in the scheme, prosecutors said.

Biotech's biggest insider scandal, in which an SAC Capital Advisors trader buddied up to a respected physician to get an early look at data on an Alzheimer's treatment, has cast an enduring shadow over the industry and its relationship with Wall Street. The trader, Mathew Martoma, was convicted of using proprietary information on Elan ($ELN) and Wyeth's then-promising Alzheimer's hopeful bapineuzumab to clear $275 million in profits and avert losses for SAC. Martoma received a 9-year sentence and, as his wife told The New Yorker this month, maintains his innocence.

- here's the SEC's release
- read the criminal complaint (PDF)

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