SEC Enforcement Action Against Former Medical Director of Gliatech, Inc For Insider Trading

SEC NEWS DIGEST
Issue 2004-157 August 16, 2004

On August 12, the Commission filed a complaint for insider trading
violations against Derrick S. McKinley (McKinley), a former vice
president and medical director of Gliatech, Inc. (Gliatech), a
pharmaceutical company. The complaint alleges that McKinley sold
Gliatech stock while in possession of material, non-public information
concerning problems with Gliatech's primary product, Adcon-L, a gel used
to reduce scarring in patients following back surgery. During 1999 and
2000, McKinley sold short 221,000 shares of Gliatech stock in a series
of transactions, reaping profits of approximately $1.6 million. From
the outset of his trading, McKinley was aware of three major problems
involving Adcon-L. By August 1999, McKinley (1) knew that a study of
Adcon-L clinical trials (Adcon-L Study) submitted by Gliatech to the
U.S. Food and Drug Administration (FDA) suffered from defects that
undermined its reliability; (2) knew of sterility problems resulting
from defective packaging by the overseas contractor Gliatech hired to
manufacture Adcon-L; and (3) knew of complaints of cerebral spinal fluid
leaks (CSF leaks) in patients following surgeries in which Adcon-L had
been used. When each of these three adverse developments became
publicly known, the price of Gliatech stock dropped. McKinley profited
from each of these three declines in the price of Gliatech stock.
McKinley violated the antifraud provisions of Section 17(a) of the
Securities Act of 1933 and Section 10(b) of the Securities Exchange Act
of 1934, and Rule 10b-5 thereunder. The Commission is seeking an
injunction, disgorgement and a civil penalty against McKinley. [SEC v.
Derrick S. McKinley, USDC, N.D. Ohio, Civil Action No. 1: 04CV 1643] (LR-
18832)