Brotherly Flub

It was a case of family chemistry gone awry. In 2002, what might have begun as a friendly sibling telephone conversation between Joseph Frohna, a mutual fund manager, and his brother who worked in the biotech industry became a costly insider trading scandal. Five years later, the Securities and Exchange Commission has settled its charges against Frohna, forcing him to pay $2,224,838 in penalties for his actions, the SEC said last week.

While working for U.S. Bancorp Asset Managment (now FAF Advisers) in 2002, Frohna had a conversation with his brother who was leading a study on a new drug, Raptiva, being developed by XOMA and Genentech Inc. The study's outcome would determine if the drug, designed to treat the painful skin condition psoriasis, would be approved by the Food and Drug Administration and if it could go to market.

The SEC claims that Frohna purchased shares of XOMA in 2001, less than a month after the company announced that it was beginning a "bio-equivalence" study with Genentech, where his brother was associate medical director. During the next year, Frohna, of Waukesha, Wisconsin, kept in close touch with his brother, monitoring the progress of the study that he created and managed.

The success of the drug was of particular interest to Frohna, who managed a fund with 332,000 shares of XOMA. On April 3, 2002, when Frohna inquired about the study his brother responded that "things were not going well" and that "he had problems with his study," according to the SEC.

Upon learning that the drug had failed its test, Frohna "aggressively" sold all of the XOMA shares his fund held the next morning. The following day, when XOMA and Genetech announced that drug had failed its test, shares in the company fell by 42 percent. Frohna avoided a loss of $954,776 because of his timely trade, charged the SEC.

In 2004, Frohna left US Bancorp and founded Cortina Asset Management, which became an advisor to the Employees Retirement System of Texas, a $24 billion pension fund for state workers. Frohna resigned in March from Cortina, which manages $1.7 billion in assets, after the SEC began a formal investigation into the XOMA trade.

Frohna did not admit or deny the SEC's allegations.