A federal grand jury here indicted former ImClone Systems Inc. chief executive Samuel Waksal today on 13 counts of securities fraud, bank fraud, perjury, obstruction of justice and other charges after talks toward a possible plea agreement broke down. The most serious of the charges, bank fraud, carries a maximum sentence of 30 years in prison.
Waksal, who founded the New York company with his brother Harlan in 1984, was arrested at his plush SoHo loft in June and charged with tipping off family members that the Food and Drug Administration was about to reject an initial application for Erbitux, the firm’s experimental cancer drug.
The indictment comes after the White House and other Washington officials pledged a crackdown on corporate wrongdoers in light of recent business scandals that have rocked investor confidence and shaken the stock market. Last week, two former WorldCom Inc. executives surrendered to the FBI. Executives from Rite Aid Corp., Adelphia Communications and Tyco have also been charged.
Prosecutors had been negotiating with Waksal’s attorneys about a possible guilty plea for weeks since the arrest. But talks broke down when the two sides could not agree on the size of a fine Waksal would pay and the length of a possible prison sentence, a source said. The two sides had also reportedly been discussing a blanket deal that would have spared Waksal’s father, one of his daughters and possibly other family members from indictment.
The case has tarred style guru Martha Stewart, a close friend of Waksal’s, who sold about $227,000 worth of ImClone shares before the FDA action was announced.
Stewart, chief executive of Martha Stewart Living Omnimedia Inc., has denied acting on any inside information but federal prosecutors and congressional investigators are probing the sale. Shares in Stewart’s company have suffered badly during the probe.
In addition to the securities fraud charges made during the June arrest, today’s indictment alleges that Waksal defrauded Bank of America by failing to disclose that he had already exercised a guarantee to buy ImClone shares at a low price. He used the guarantee, called a warrant, to back up a line of credit from Bank of America. Waksal is also charged with forging a letter from ImClone’s general counsel saying he still had the warrant.
In June, U.S. Attorney James B. Comey of the Southern District of New York accused Waksal of tipping off two unnamed family members identified by sources as his father, Jack, and daughter, Aliza — in late December that the FDA would reject the Erbitux application. The tips allegedly enabled the two family members to sell close to $10 million worth of ImClone shares before the stock, which was already dropping on rumors about Erbitux, began to plunge following the official announcement on Dec. 28.
Comey also charged Waksal with attempting, but failing, to sell ImClone shares of his own in the days before the announcement.
Today’s indictment also accuses Waksal of conspiring with two people, identified by sources as his father and daughter, to obstruct a Securities and Exchange Commission investigation; making false statements to the SEC; and destroying documents pertinent to the SEC investigation. And the indictment alleges that one Waksal associate, believed to be his father, wired $2.8 million back to Samuel Waksal after the improper stock sales.
If convicted, Waksal faces five years in prison on the three conspiracy counts, the perjury count and the obstruction-of-justice count. The securities fraud counts carry possible 10-year prison sentences, and the bank-fraud count carries a 30-year maximum sentence. The potential fines on all the counts total more than $1 million.
Waksal could not be reached for comment on the indictment tonight. “This is a painful chapter in Dr. Waksal’s life, but he continues to believe in ImClone and Erbitux as holding out real hope for millions of cancer patients,” his attorney, Mark Pomerantz, said in a statement. “Like all Americans, he is presumed to be innocent, and he will respond to these charges as required.”
Waksal’s failure to reach a deal with prosecutors could heighten the chances that his father, daughter and perhaps other family members could face charges, a source said. The indictment alleged perjury and other illegal acts by people he tipped, identified by sources as Jack and Aliza Waksal.
Charles Stillman, an attorney for Jack Waksal, declined to comment on the accusations in the indictment. “Jack Waksal’s only concern at this time is for the well-being of his son Sam,” he said. Efforts to reach attorneys for Aliza Waksal were unsuccessful.
The indictment is the culmination of a months-long saga that has fed the nation’s skepticism about business ethics, tarnished a major investment bank and implicated celebrity lifestyle guru Stewart. It has also dismayed many cancer patients who had been counting on Erbitux as a last shot at survival.
The case began with a series of positive scientific reports and glowing news articles last year on Erbitux, which was showing promise as a potential treatment for colon cancer, among other major tumors. The drug is one of a new generation of treatments designed to be less toxic than existing chemotherapy.
Bristol-Myers Squibb Co., the New York drug giant, agreed to pay some $2 billion for a stake in ImClone and rights to Erbitux. It was the largest such deal in history, catapulting ImClone, a small New York biotechnology company, into the limelight.
Rising investor enthusiasm drove ImClone’s shares to new highs, culminating in a record close of $73.83 on Dec. 5. But later that month the FDA temporarily rejected the drug, citing numerous problems in ImClone’s tests, and the shares plunged. The FDA has asked for additional tests that could take years.
A series of investigations in Washington and New York has focused on what happened in the days between Dec. 25, when an ImClone executive learned for certain that the drug would be rejected, and Dec. 28, when that news was finally made public.
Trading by corporate insiders based on important information not yet made public is a crime. There was a pattern of unusual trades in ImClone shares that week.
Investigators have documented a series of phone calls between Samuel Waksal and his relatives on Dec. 26 and 27. Investigators have said his father, Jack Waksal, sold more than $8 million worth of shares on Dec. 27 and 28, locking in profits, and Samuel Waksal’s daughter, Aliza, sold nearly $2.5 million of shares on Dec. 27. Other Waksal relatives and associates are believed to be under scrutiny as well. These trades were all completed before the bad news was made public late on Dec. 28.
Investigators have also said that Samuel Waksal tried to lock in additional gains by transferring some $5 million worth of shares he owned to Aliza Waksal before having them sold. But those shares were subject to restrictions and two brokerage houses, including Merrill Lynch & Co., refused to sell them without permission from ImClone’s lawyers, so the trades never went through.
Two Merrill employees, star broker Peter Bacanovic and his assistant Douglas Faneuil, are believed to have been involved in some of the other Dec. 27 and 28 trades by Waksal relatives. Later that day, one of their most prominent clients, Martha Stewart, sold $227,000 worth of ImClone shares, locking in gains.
Investigators have documented an attempt by Stewart to reach Waksal, a friend of hers, on Dec. 27, but have not proven that the two ever spoke. She has denied trading on inside information and has claimed she had a prior arrangement with Bacanovic to sell if the shares dropped below $60, which they did that day.
But congressional investigators are skeptical of that story and this week demanded additional documentation from Stewart. Merrill has suspended Bacanovic and Faneuil with pay, with sources saying the two men have given conflicting accounts of the Stewart transaction.
Absent a guilty plea from Waksal, the government could have a difficult time winning convictions, one legal expert said today, unless prosecutors can find another target who will cooperate.
“The government was hoping to turn Waksal and make things easier,” said University of Pittsburgh law professor Sandra D. Jordan, a former federal prosecutor. “Now he’s not talking, his family is not talking and Martha Stewart is not talking. Unless someone else comes forward to explain what was said in those conversations [regarding Erbitux], then the government has a circumstantial case, though not an impossible one.”