By Bethany McLean

(FORTUNE Magazine) – LONG BEFORE MERCK WITHDREW Vioxx from the market this fall, a doctor named Eric Topol, the chairman of cardiology at the prestigious Cleveland Clinic, had emerged as one of the drug's chief critics. After the drug's recall, Topol was widely quoted criticizing Merck's handling of the matter, even accusing the company in a New England Journal of Medicine article of putting "sales over safety." But Topol had another role that, on the surface, could raise questions about his motivations. The situation illustrates the conflicts that can emerge when doctors step outside the world of medicine and become entangled with Wall Street.

At the same time he was criticizing Merck, Topol served on the scientific advisory board of a $176 million hedge fund called the Biomedical Value fund, run by Great Point Partners. According to the fund's April 2004 marketing material, obtained by FORTUNE, advisors such as Topol were expected to "provide 'heads up' in advance of major medical meetings to 'get the jump' on trading/investment strategies." An October 2004 presentation adds that its board of advisors are "active participants in the Fund," and a "source of proprietary investment ideas." And it says that $17 million of the fund's capital comes from founders and advisory board members.

The fund has performed spectacularly--and part of its recent gain is directly attributable to the fact that it was shorting Merck. In its September 2004 performance summary, Great Point Partners gave Topol a portion of the credit. "Vioxx, while good for your arthritis, can be very bad for your heart. Eric Topol, M.D., of our Medical Advisory Board, has been singing this tune since 2002, and we were on the right side [short] of that situation."

In an interview, Topol said that he had no knowledge of Great Point's investments--and never gave it advance information. He added that he had no money in the fund and received only a "nominal" annual fee. In a later interview, Topol said that after learning from FORTUNE how the hedge fund was describing his role, he immediately resigned. "I'll never work with them again," he said. (Dr. Jeffrey Jay, the co-founder of Great Point, did not return FORTUNE's phone calls.)

That wasn't the only connection between Great Point Partners and Topol. On Jan. 6, 2004, Topol was appointed the chairman of the advisory board of a Canadian company called Forbes Medi-Tech, which is developing a cholesterol drug. According to the company's filings, Topol got one million options. That same day Forbes Medi-Tech announced that it had raised $10.75 million from a group of investors--including Great Point. Forbes Medi-Tech's CEO, Charles Butt, called the combination of the financing and Topol's appointment a "strong endorsement of the prospects for our portfolio of cardiovascular compounds."

Investors stampeded into the stock. Then, three months later, Forbes Medi-Tech announced results from the clinical trial of its drug. "Data meets primary endpoint in cholesterol reduction" read the press release, which quoted Topol as saying that the trial "produced statistically significant results, which establishes that the compound lowers cholesterol." He added, "I am looking forward to working with Forbes on the next phase of its clinical development program."

In fact, the trial showed that the drug reduced cholesterol less than the FDA mandate--which explains why the stock plummeted. CEO Butt still stands behind the drug, saying that the trial was simply "proof of concept" and that he does not view the results as disappointing. But Topol has backed away, telling FORTUNE that the results were "disappointing." When asked about the press release, Topol says, "It can be a struggle working with any company if things aren't particularly rosy," and that his words, while positive, were "very different from how they wanted me to come out."

Because his options were contingent on the drug's success, Topol said he didn't stand to profit because the drug has "no future." Then, in mid-November, Forbes Medi-Tech announced that Topol was leaving its board due to increased demands on his time; as a result, he forfeited all his options. According to the press release, the new head, Dr. Steven Nissen, also of the Cleveland Clinic, "stipulated that any compensation for his consulting services be directed to charity, and therefore, he will have no financial relationship with the company." Wise move. -- Bethany McLean