by John M. Curtis
(310) 204-8700

Copyright June 21, 2002
All Rights Reserved.

ree on $10 million bail for eight counts of securities fraud, conspiracy and perjury, former ImClone CEO, flamboyant high-roller Samuel Waksal asserted his 5th Amendment right against self-incrimination before the House Energy and Commerce Committee. Only a day before the Food and Drug Administration rejected ImClone's promising anticancer drug Erbitux, Waksal's family cashed in, dumping $10 million worth of company stock on Dec. 27., causing a "run on the bank," eventually plummeting share prices from $60 to its current value of eight dollars. Also stung by the insider trading scandal was Sam Waksal's good friend Martha Stewart whose stock broker "coincidentally" liquidated her 3,928-share ImClone portfolio also on the same day. "After directing my broker to sell, I placed a call to Dr. Waksal's office to inquire about ImClone," said Stewart, denying that she engaged in insider trading. Flying in the face of logic, "I did not reach Dr. Waksal and he did not return my call. In placing my trade I had no improper information. My transaction was entirely lawful."

      Complicating Stewart's problems, Merrill Lynch placed her broker Peter Bacanovic and his assistant Douglas Faneuil on "paid leave," pending further investigation. Merrill Lynch is currently being sued for "analyst fraud," duping investors into buying high-risk dot-coms before the market crash in March 2000. Stewart told congressional investigators that she decided to sell sometime in late November, despite Bacanovic admitting that they decided after Dec. 10, around the time that Sam's younger brother Harlan Waksal found out from sources inside the FDA that it didn't look good for Erbitux. Though the FDA's public rejection wasn't official until the end of trading on Dec. 28, Harlan knew the company was on shaky ground in early December. Stewart's decision to unload her ImClone shares on the exact day that Waksal's family dumped $10 million raises red flags to SEC investigators. Since the story broke, shares of Martha Stewart Living Omnimedia dropped about 20%, raising anxiety in the investment community.

      Despite Stewart's woes, analysts are still bullish on her $296 million publishing, merchandising and Internet empire. "It's [insider stock trading] an issue most of America doesn't know about or doesn't care about," said media analyst Alissa Goldwasser with William Blair in Chicago. True to form, "I believe there is a tremendous opportunity for the shares to rebound. I think it's misplaced concern on the part of investors," pretending that Stewart's role in an insider trading scandal wouldn't decimate her company's credibility. Who's she kidding? With Stewart's brokers already on "paid leave," any indictment would be catastrophic to her company. Stewart's brand name is inseparably tied to her good name. Whistling Dixie, "I perceive a balancing act between having her as a charismatic spokeswoman and ensuring the long-lived nature of the brand," said Goldwasser, pretending that Stewart's company would survive a public relations nightmare. Skating on thin ice, Stewart has a lot of explaining to do about how she timed her sale of ImClone to the exact day Waksal's family dumped $10 million.

      On the day Waksal's family and Stewart unloaded their shares, former ImClone CEO Sam Waksal tried to illegally transfer his holdings to a family member for immediate liquidation. His brokers refused to cooperate, mindful of restrictions on insider stock sales. Stewart, a former stock broker, sold $228,00 on Dec. 27, raising suspicions about insider trading, though claiming her brokers were merely executing a "limit order," when the stock fell below $60. Stewart's story stretches plausible deniability to the breaking point. With her net worth in the millions, it's mind blowing that she would risk everything for a few hundred grand. Playing fast and loose, Waksal, a business-savvy physician, also should have known better, trying to pull a fast one on the SEC. Congressional investigators are scratching their heads trying to figure out Waksal's thinking. Surely he had faith that his biotech company would survive an initial rejection of Erbitux by the FDA.

      Like so many other biotechs and dot-coms, ImClone was also built on a stack of cards, exploiting investment bankers to dupe the SEC into taking an otherwise speculative venture public. "The saddest story is not about investors losing money," said Rep. W.J. "Billy" Tauzin (R-La.), chairman of the House Energy and Commerce Committee. "What we see is a drug development and FDA review system that is not necessarily serving the best interests of the people of America and its cancer victims . . . We've got to fix the system," lamenting how clever entrepreneurs place greed over the consumer welfare—especially cancer patients. But Tauzin should also focus on how the SEC dropped the ball, failing its due diligence and approving so many empty shells for public offerings. Blaming zealous entrepreneurs is one thing, but allowing the SEC to approve highly speculative unprofitable businesses is an outrage. ImClone was just one among many questionable biotechs seeking riches by promoting dubious research and hyping product claims to impress Wall Street. Proving this point, why else would Waksal risk everything for insider trading?

      Taking the 5th, Former ImClone CEO reminded wary investors that the stock market isn't worthy of the public's trust. With the U.S. stock market reeling from endless scandals, ImClone's shenanigans tell shareholders that private investors are low on the food chain. Only luminaries like Martha Stewart have the inside scoop to dump shares before the bottom falls out. While $228,000 is chump change to Stewart, she didn't hesitate to cover her rear end. Even as ImClone sinks to the bottom, the corporate spin machine still wants to entice naïve investors to stay the course. "As the company"s new chief executive officer, I am absolutely committed to getting this drug approved," said Harlan Waksal, ImClone's newly minted smoke blower, knowing full well that the company's days were numbered. Whether Erbitux ever had real potential as an anticancer drug is anyone's guess. Judging by his brother's attempt to liquidate his entire holdings, it's doubtful whether Erbitux had much future. With Martha Stewart bailing out, savvy investors shouldn't hold their breath.

About the Author

John M. Curtis is editor of OnlineColumnist.com and columnist for the Los Angeles Daily Journal. He's director of a Los Angeles think tank specializing in corporate consulting strategic communication. He's author of Dodging The Bullet and Operation Charisma.

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