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Hedge fund paid for inside data, state says

Cambridge company’s license may be revoked

By Beth Healy
Globe Staff / March 10, 2011

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Secretary of State William F. Galvin charged a Cambridge hedge fund manager with using inside information about drug trials from a so-called expert network firm to profit on trades in pharmaceutical stocks.

Galvin is looking to revoke the license of Risk Reward Capital Management Corp. and its principal executive, James A. Silverman.

In a complaint filed yesterday, the state alleged that Silverman, 43, paid for nonpublic information on two stocks from Guidepoint Global, a New York expert networking firm that connects investment clients with industry specialists and company insiders.

Some of Guidepoint’s outside experts are facing charges in a broad federal probe of insider trading by hedge funds and this type of research firm. The US investigation has focused on a number of expert firms, as well as employees of publicly traded technology companies illegally providing earnings and sales figures to investors through expert network firms.

Silverman, who specializes in biotech stocks, talked to 225 expert consultants during 2009 and 2010, the state alleged. Many of those were doctors involved in clinical trials, reporting on how well drugs were working on patients.

According to the state, the returns of Risk Reward Capital Management, which manages about $24 million, jumped dramatically after the firm hired Guidepoint consultants. In one case, Silverman’s firm consulted clinical investigators working on a cancer drug trial for Ariad Pharmaceuticals Inc. of Cambridge, and bought shares in Ariad before trial results were made public. The stock’s price surged 30 percent in a day, according to the complaint.

Silverman’s lawyer, Peter R. Pendergast, called Galvin’s allegations “unfounded and reckless.’’ He said firms such as Guidepoint Global are “universally used by responsible and law abiding analysts and fund managers as part of a legitimate due diligence process.’’

Galvin said the case “highlights the role of expert consultants in hedge fund investments, a role that can easily evolve into insider trading, to the detriment of investors not privy to the information.’’

Guidepoint Global, which has an office in Boston, was subpoenaed in the case but not charged. In a statement, the company denied any wrongdoing, saying its “compliance policies and controls conform to the highest industry standards.’’ The company said it cooperated fully with Galvin’s investigation.

Investigators for the state Securities Division, which Galvin oversees, identified the consulting relationship with Guidepoint in a routine examination of Risk Reward Capital.

Upon visiting Silverman’s place of business, investigators for the state found a “disorderly office,’’ with sensitive financial records strewn across tables, chairs, sofas, and floors, according to the complaint.

Investigators said they uncovered evidence that Silverman had deleted certain documents related to Guidepoint and that, when questioned about one of the instances, said he had worried that “maybe I crossed a line on this one.’’

The division said it found other violations, including failing to make sure clients were financially qualified to invest in a hedge fund.

A hedge fund that Silverman started in 2007, RRC Bio Fund, lost nearly 17 percent of its value the first year, according to the state. After hiring Guidepoint Global in 2008 for $80,000 a year, the fund produced returns exceeding 50 percent in both 2009 and 2010, the state alleged.

In addition to the Guidepoint fee, Silverman’s fund paid $400 to $1,000 an hour to experts working on drugs for Ariad and Questcor Pharmaceuticals Inc. of Union City, Calif.

Maria Cantor, a spokeswoman for Ariad, said in a statement that the company is “firmly opposed to outside clinical investigators, who are under confidentiality agreements with the company, providing nonpublic information to investors or their consultants.’’

Beth Healy can be reached at bhealy@globe.com.