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Wife charged with Cubist insider trading

The wife of the former chairman and chief executive of Cubist Pharmaceuticals Inc. was charged with insider trading yesterday for allegedly giving her brother a "wink and a nod" to sell his shares in the firm before the Lexington company disclosed its pneumonia treatment had failed a key test.

In addition to Patricia B. Rocklage, 53, of Sudbury, the Securities and Exchange Commission also brought civil fraud charges against her brother, William M. Beaver, and his close friend and neighbor, David G. Jones, whom Beaver allegedly also tipped off to the disappointing test results.

Beaver and Jones, the SEC said, avoided a combined $232,749 in losses when they allegedly acted on Rocklage's tip about the test results and sold their Cubist shares two weeks before the company's Jan. 16, 2002, disclosure caused its stock to plummet 46 percent.

Moreover, the commission said, Beaver and Jones, both of Charlotte, N.C., made "false and inconsistent" statements to investigators about their stock sales.

Attorneys for the defendants said their clients would contest the allegations, which are contained in a lawsuit filed in US District Court in Boston.

"We believe the case is without merit," said David Marder, Patricia Rocklage's lawyer.

Jones's attorney, James Wyatt, said his client "used his own judgment in trading his stock and did not rely on any inappropriate information."

Wyatt also said that Jones never got "privileged or material information" from Beaver and had been "truthful" in his statements to investigators.

Rocklage herself did not sell Cubist shares. Rather, the government said, she violated a trust to Cubist, its shareholders and her husband, Scott Rocklage, Cubist's chief executive at the time, when she passed along privileged information about the test results to her brother. The SEC contends that Beaver and Jones should have known the tip they were receiving was the result of a breach of duty by Patricia Rocklage.

Scott Rocklage was chief executive from 1994 to June 2003, and took the company public in 1996. He stepped down two weeks ago from the board of directors, which he had chaired since 2000.

Scott Rocklage's attorney did not return calls seeking comment.

Eileen McIntyre, a spokeswoman for Cubist, said the company "and its personnel have cooperated fully with the SEC's inquiry, and we are not aware of any planned action by the SEC against the company or Dr. Rocklage."

The SEC said the case was referred to it by the National Association of Securities Dealers, the securities industry regulator that routinely monitors stock-trading activity around company announcements.

On Dec. 31, 2001, Scott Rocklage learned that Cubist's antibacterial product Cidecin had failed in a late-stage test to outperform another drug for treatment of a severe form of pneumonia. Later that day, the SEC said, he called his wife while she was riding home from Logan International Airport in a limousine and told her of the results.

During the call, Rocklage even "specifically instructed her not to react to what he was about to tell her and not to talk about the results in front of the limousine driver," the SEC said. Later that night, the Cubist chief executive told his wife the test results were not public until disclosed by the company, and that the news would significantly hurt the stock price.

The SEC said Patricia Rocklage previously had kept confidential privileged Cubist information her husband had disclosed to her, so Scott Rocklage "reasonably expected, before conveying the information, that" his wife "would maintain the trial results in confidence."

But unbeknownst to her husband, Patricia Rocklage had agreed to give her brother a "wink and a nod" to sell his stock when she had bad news, the SEC said. When she told her husband that she intended to signal her brother, Scott Rocklage "responded by urging her not to and made it clear that he would be unhappy with any communication she might have with her brother regarding the trial results," according to the complaint.

Despite her husband's entreaties, Patricia Rocklage called her brother and said that as "far as Cubist is concerned, I'm giving you a wink and a nod," the SEC said.

Beaver then sold 5,583 Cubist shares on Jan. 2, 2002, for about $196,000. A day later, Jones sold his 7,500 shares for about $262,000. Cubist announced the Cidecin news after the close of the market on Jan. 16; the next day, its stock fell $14.73, or 46 percent, to $17.02.

The SEC wants the defendants to give up any gains they made on the stock sales, and to pay penalties of up to three times the losses they avoided by trading on the alleged insider information.

Cubist has since renamed the drug Cubicin, and in September 2003 received approval from the federal Food and Drug Administration to use it to fight serious skin infections.

The company's stock price, however, remains depressed from earlier levels, closing down yesterday 46 cents, or 4.05 percent, to $10.90.

Andrew Caffrey can be reached at caffrey@globe.com.

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