For over five years years, the former Director of Financial Reporting at Celgene Corp. engaged in an insider trading scheme. The government contended that John Lazorchak passed along inside information through middlemen, distributed and received profits from the insider trading exclusively in cash, and developed a limited code language to talk about non-public information.
But all this secrecy was not enough.
On April 22, 2014, Mr. Lazorchak, who had pleaded guilty to five counts of securities fraud and one count of conspiracy to commit securities fraud last year, was sentenced. Given the length of the scheme, he was probably lucky to have lawyers who convinced the court to sentence him only to 16 months in prison.
How the Scheme Worked
According to the information, the seeds of the insider-trading scheme were planted in 2007, when Mr. Lazorchak left Sanofi-Aventis Inc., the pharmaceutical giant, for Celgene Corporation. In early 2008, he became Celgene’s Director of Financial Reporting.
And that’s when the scheme allegedly began.
According to the government, Mr. Lazorchak soon began feeding information to several of his high school friends. In its complaint, the government identifies Mark Cupo as Mr. Lazorchak’s first recipient of non-public information.
Mr. Cupo, a friend from high school and Mr. Lazorchak’s superior at Sanofi-Aventis Inc., would accept inside Celgene information from Mr. Lazorchak. To avoid suspicion, though, the two men allegedly passed their information to two middlemen. Those middlemen would buy or short stocks based on Mr. Lazorchak’s reports. In return, the middlemen would allegedly kick money back to Mr. Cupo who would in turn pay Mr. Lazorchak.
In addition to the arrangement with Mr. Cupo, the government’s criminal complaint alleged that Mr. Lazorchak set up a similar arrangement with two other long-time friends. There are all sorts of interesting personal connections between the co-defendants.
What Insider Information Was Traded?
In his position at Celgene, Mr. Lazorchak had access to a wide range of inside information. He shared and profited off this non-public information in three ways.
- First, Mr. Lazorchak told his friends about two of Celgene’s planned acquisitions. Celgene intended to purchase both Pharmion Corporation and Abraxis Bioscience Inc. at significant premiums. Mr. Lazorchak allegedly disclosed this information to Mr. Cupo and another friend, who then passed the information on to others. The tippees were able to buy Pharmion and Abraxis stock before the companies were purchased, and then sell the stock for a substantial profit after the deals were complete.
- Second, Mr. Lazorchak allegedly passed on non-public information about Celgene’s expected quarterly earnings. With advance knowledge of the company’s performance and the effect of that performance on the stock price, Mr. Lazorchak’s friends regularly profited off the announcement of Celgene’s quarterly earnings.
- Third, the government contended, Mr. Lazorchak passed along non-public regulatory information. In June 2012, for example, Mr. Lazorchak revealed to two of his friends, through Mr. Cupo, that Celgene’s stock price would be negatively affected by forthcoming regulatory news about one of Celgene’s cancer drugs.
The government also alleged that Mr. Cupo and other of the middlemen revealed information gained from their employers and would share in the profits reaped from using that non-public information.
One such instance was the planned acquisition of Orthovita Inc. by Stryker Corporation. One of the supposed participants in this scheme, Mark Foldy, worked as a marketing executive at Stryker and learned of the deal during a small, confidential meeting.
Before the acquisition had been announced, Mr. Foldy allegedly told Mr. Lazorchak about the deal. As stated in the government’s information, Mr. Lazorchak then passed this tip through Mr. Cupo to three others who bought substantial shares of Orthovita. (Mr. Foldy has since pleaded guilty to securities fraud, as has Mr. Cupo.)
Mr. Lazorchak and his friends went to great lengths to keep their insider trading activity secret. On the most basic level, the men involved always tried to avoid paper trails.
According to the government, Mr. Lazorchak, Mr. Cupo, and Mr. Foldy would meet in person and would always accept their cut of the insider-trading profits in cash.
Plus, the government suggests that Mr. Lazorchak and Mr. Cupo never directly engaged in the stock transactions themselves. They would provide the inside information to some of the participants, and then accept a portion of the profits as a kickback.
Mr. Lazorchak purportedly developed a code to further conceal his insider-trading arrangement. According to the government information, he would use the phrase “the fat man” to refer to non-public information on upcoming deals and “vacation pictures” as code for cash payments from some of the participants.
Mr. Lazorchak also allegedly lied to his employer in an attempt to cover up his insider trading. Following the Pharmion deal, FINRA provided Celgene with a list of the people and entities that traded Pharmion stock in advance of the deal. FINRA then asked Celgene whether any members of the Pharmion deal team knew any of the individuals on the list. Though Mr. Foldy and another participant in the scheme were on the list, Mr. Lazorchak allegedly said that he had no knowledge of any of the listed individuals.
All told, the insider-trading scheme yielded roughly $1.5 million in profits across all its participants and all their transactions. However, the participants were not as successful in keeping the scheme a secret as they thought. They had attracted the attention of the FBI.
Facing the government’s strong case against him, Mr. Lazorchak agreed to a guilty plea. He pleaded guilty to one count of conspiracy to commit securities fraud in violation of 18 U.S.C. § 371, and five counts of securities fraud in violation of 15 U.S.C. §§ 78j (b) and 78ff (a) and 17 C.F.R. section 240.10b-5.
Mr. Lazorchak was then sentenced before Senior United States District Judge Katharine Hayden. Despite the size of the scheme and its length, Mr. Lazorchak received six concurrent, sixteen-month sentences, which will be followed by two years of supervised release.
As with most insider trading cases, Mr. Lazorchak faces a parallel SEC case as well.