Let me tell you one of the most remarkable stories I've come across in my almost five years of contributing to The Motley Fool.
In June last year I wrote an article about Innate Immunotherapeutics Ltd (ASX: IIL). It was a biotech company, grossly overhyped (in my opinion) and it had a failed clinical trial that saw its share price fall by 91% when it returned to trade.
Nothing unusual about that.
I then published a brief follow-up piece showing the share price chart, which is what I normally do when a company experiences a heavy fall in a single day. The price chart showed something highly unusual. I have annotated it here to make it more clear:
Note the time of the apparent plunge in the share price? I don't have trade data that far back, and without getting a pixel ruler out, the trading looks to have been around 12.30pm.
According to the ASX markets platform, Innate Immunotherapeutics entered a trading halt at 12.53pm, after an apparent sharp decline in the share price (according to Google's data).
The company called for a two-day trading halt as it had received results from its Phase 2B trial. The results of the trial were not publicly disclosed until Tuesday (2 trading days later) when the stock plunged 91%. However, in my opinion, it really looked as though there was strong selling activity before the trading halt.
I wrote at the time:
"Curiously from the Google chart it also looks as though the sell-off began on Friday a few minutes before the company hurriedly entered a trading halt. The announcement was only this morning which suggests that somebody with knowledge of the results was front-running the announcement. That's something I'd hope the regulator will be looking closer at."
While I was concerned about what I thought was potentially insider trading, it was a throwaway comment on behaviour I've seen dozens of times over the years in ASX microcaps, and I didn't think any more of it.
Little did I know that a journalist called Jerry Zremski, the Washington Bureau chief of The Buffalo News was following the story.
Jerry got in touch on Twitter and we exchanged emails. As it happens, a US Congressman, Chris Collins, had a large investment in Innate Immunotherapeutics and was a director of the company until 4 May 2018.
News coverage in the US suggested that this information was fairly widely known in the US also.
Over the course of several months Jerry pursued the story tenaciously and just yesterday, US Congressman Chris Collins, his son Cameron Collins, and a Stephen Zarsky were arrested by the FBI for conspiracy to commit securities fraud – by trading on inside information in Innate Immunotherapeutics.
According to The Buffalo News:
"Collins has been charged with one count of conspiracy to commit securities fraud, seven counts of securities fraud, one count of wire fraud and one count of making false statements to the FBI. His son and Zarsky face similar charges."
Which is an incredible outcome for what I thought was an otherwise unremarkable pump and dump in an ASX biotech stock.
I would like to stress that the charges are just allegations at this point. I would also stress that I had no role in the story whatsoever beyond an email or two with Mr Zremski.
Innate Therapeutics released an announcement this morning stating that they had cooperated with all investigations, that no other officers of the company were under investigation, and that they considered this matter private to Congressman Collins.
According to media reports, the US SEC made the following statement:
""We allege that Christopher Collins breached his duty of confidentiality to Innate's shareholders, exploiting his access to nonpublic information about the company's clinical trial results so that his son could avoid significant financial losses," said Stephanie Avakian, Co-Director of the SEC Enforcement Division, in a press release.
"Our laws are designed to prevent and punish such misconduct, which undermines investors' trust in the fairness and integrity of our markets."
Australian investors may of course wonder why this ASX insider trading is being prosecuted by the SEC instead of our own suited gentlemen at ASIC.
They will have to keep wondering, as ASIC is not particularly quick off the mark, and I don't think I've seen a comment from ASIC Media in the 14 months since the alleged insider trading at Innate.
Let this be a lesson to investors out there considering investing in risky parts of the market in unproven or speculative miners, biotechs, and technology stocks. Suspicious trading is not the unusual part of this story – what's unusual is that they got caught.
