A Congressman, a Drug Promoter, and Now an Accused Criminal

(Bloomberg) -- For years Chris Collins, a congressman from New York, seemed to work all the angles for an obscure biotech company in faraway Australia.

He invested millions. He plugged the company as he sat on its board and smoothed the way for its most promising drug.

When asked if he discussed the company, Innate Immunotherapeutics Ltd., with members of Congress and staff, Collins responded, "The bigger question would be, who haven’t I talked to?”

A Congressman, a Drug Promoter, and Now an Accused Criminal

With news on Wednesday that Collins was charged with insider trading after he allegedly tipped off others to nonpublic information about Innate, prosecutors have zeroed in on stock trading on Capitol Hill, a practice fraught with potential conflicts. His indictment suggests that recent efforts to head off suspicious activities in Washington have fallen short, and it comes amid a flurry of examinations into politicians and government officials who enrich themselves and their associates, often well within the law’s outlines.

Collins, 68, is accused of sharing non-public information about a failed drug trial with his son, Cameron, who dumped his shares and alerted others, prosecutors said. Cameron Collins, 25, was also charged, as was his girlfriend’s father, Stephen Zarsky, 66.

‘Fertile Ground’

Collins turned himself in to authorities Wednesday morning. He later appeared in Manhattan federal court where he and the two others pleaded not guilty. Lawyers representing the congressman and his son said they intended to mount vigorous defenses. An attorney for Zarsky declined to comment. Collins was released on a promise to provide a $500,000 bond.

He later said on Twitter that the charges are meritless and he plans to fight to clear his name while seeking re-election.

The three men were also sued by the U.S. Securities and Exchange Commission.

“The temptation to make easy money -- or as alleged in the Collins case, easily avoid losses -- is fertile ground for toxic mistakes,” said Justin Danilewitz, a former federal prosecutor, who said the case demonstrates a lack of appreciation for the government’s market-surveillance activities.

Collins’s relationship with the Australian company dates back decades, according to a congressional ethics report last year. Before he was elected to Congress, he co-owned a company that supplied researchers with an inventory of bacteria, viruses and other clinical specimens. In the 1990s, his company provided specimens to Virionyx Corp., a New Zealand company working on a cure for HIV/AIDS.

In 2005, Collins and several investors from the Buffalo area put $6 million to $8 million into Virionyx, and he joined the board of directors. In 2009, the company changed its name to Innate.

After efforts to find an HIV/AIDS cure failed, the company’s brass thought it had a winner in another drug being developed to treat multiple sclerosis. In 2013, Collins promoted Innate’s multiple sclerosis drug in a congressional subcommittee hearing without disclosing his connection to the company. He was invited to a meeting at the National Institutes of Health where he requested that an NIH employee meet with Innate representatives to discuss the clinical trials, according to the congressional ethics report.

Further Milestone

Initially, the drug looked promising. In the weeks leading up to the publishing of the results of the drug’s trial, the company consistently made positive statements. On June 21, 2017, it said it had cleared an early hurdle in securing approval in the U.S., “a further important milestone in the ongoing clinical development of the company’s lead drug candidate.”

At that time, Collins was the biggest investor in the company, and two of his children were investors as well.

On June 15 of that year, his son, Cameron, used money from his 401(k) to purchase 16,508 Innate shares, adding to his position of more than 5 million shares. Five days later, his girlfriend, Lauren Zarsky, invested for the first time, buying more than 40,000 shares.

A year earlier Lauren had nudged the rest of her family. “I think we all need to consider investing in Innate Therapeutics,” she wrote her mother, Dorothy Zarsky,. She later added, "And we’ll always keep in touch with Cam’s dad, who I’m guessing would know how things are looking as we get closer to the end of the trial.”

Stephen and Dorothy Zarsky had purchased a total of 353,005 shares of Innate before the failed drug trial became known, prosecutors said.

’Clinical Failure’

The Innate purchases didn’t work out as planned. On June 22, 2017, Innate’s chief executive sent an email to the board saying that he had "extremely bad news" and that the results "pretty clearly indicate ‘clinical failure’.”

Collins was at a congressional picnic on the south lawn of the White House at the time. He replied to the email, "Wow. Makes no sense. How are these results even possible???”

Immediately, he rang his son several times before finally getting through and passing on the bad news. Cameron Collins then told his girlfriend, her parents and a friend, prosecutors said. Stephen Zarsky relayed the news to his brother and a friend.

The next day, Cameron Collins, his girlfriend, Stephen Zarsky, Zarsky’s brother and Zarsky’s friend sold more than 1 million shares of Innate, representing 53 percent of the shares that changed hands that day.

Ultimately, Cameron Collins, Zarsky and the others sold more than 1.78 million Innate shares and avoided losses of about $768,000.

The company announced the negative results after markets closed on June 26, 2017. The next day the shares fell 92 percent.

The elder Collins, who is serving his third term in Congress, may have been precluded from selling his own shares after learning of the failed drug trial, prosecutors said. He was already under investigation by the Office of Congressional Ethics over his holdings and promotion of Innate. Furthermore, his shares were held in Australia and subject to a trading halt, while his son had already transferred his shares to a U.S. broker.

Dorothy and Lauren Zarsky agreed to settle SEC claims without admitting wrongdoing, to pay fines and to repay their gains. Neither woman could be located for comment.

None of the other congressmen who owned shares in Innate were mentioned by prosecutors, who declined to say whether others might be charged.

Among those who profited from Innate were former Health and Human Services Secretary Tom Price, who sold his shares to avoid potential conflicts as he joined the administration. Price has said he did nothing wrong, and his shares were divested two months before the drug trial was completed.

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