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Citing 'Harm That You Wrought,' Judge Sentences Waksal to 7 Years

His pleas for leniency rejected, the former chief executive of ImClone Systems is fined $4.3million in insider trading case.

June 11, 2003|James F. Peltz | Times Staff Writer

Samuel D. Waksal, the fallen founder of drug maker ImClone Systems Inc., was sentenced Tuesday to more than seven years in prison and fined $4.3 million by a federal judge who called Waksal's insider trading abuses "truly incalculable."

Waksal is the first prominent U.S. chief executive to be sentenced to prison in the corporate scandals that erupted after Enron Corp. collapsed in 2001.

The ImClone affair also has entangled Martha Stewart, a close friend of Waksal's. Stewart last week was indicted on five felony counts linked to her sale of ImClone stock in late 2001. Prosecutors allege that she sold nearly 4,000 shares after being tipped off that Waksal was selling with the knowledge that bad news concerning ImClone's most prominent cancer drug, Erbitux, was imminent.

Stewart and her former stockbroker at Merrill Lynch & Co., Peter Bacanovic, both pleaded not guilty. Stewart stepped down as chairwoman and chief executive of her company, Martha Stewart Living Omnimedia Inc.

Waksal himself pleaded guilty in October to six counts, including securities fraud and perjury, stemming from his desperate attempt to dump ImClone's stock ahead of the Erbitux news. He also pleaded guilty to a bank fraud charge.

At his sentencing in a packed Manhattan courtroom, U.S. District Judge William Pauley rejected pleas by the contrite Waksal for a lighter sentence and ordered him to serve 87 months in prison and pay $4.3 million in fines and back taxes.

"The harm that you wrought is truly incalculable," Pauley said. "You abused your position of trust as chief executive" and "undermined the public's confidence in the integrity of the capital markets," the judge told Waksal, 55. "Then you tried to lie your way out of it."

The penalty reflects the tough sentencing guidelines for corporate crimes that have been put in place since scandals involving Enron and other companies broke out nearly two years ago, said James L. Sanders, a former major fraud prosecutor for the U.S. attorney's office in Los Angeles.

"This is a very heavy hit for an insider trading case," said Sanders, who also headed the Securities and Exchange Commission's L.A. office for two years and now is a private securities lawyer at McDermott, Will & Emery in Los Angeles.

By comparison, Ivan F. Boesky, the central player in Wall Street's insider trading scandals of the '80s, served just two years at a federal prison camp in Lompoc, Calif. Boesky, who pleaded guilty to one felony, also paid $100 million in penalties.

The sentencing completed a steep downfall for Waksal, an immunologist and former socialite who once partied with celebrities and collected fine art. Yet even that passion was abused by Waksal. In March, he pleaded guilty to evading $1.2 million in taxes on $15 million worth of art. He joined another scandal-plagued executive, former Tyco International Ltd. CEO L. Dennis Kozlowski, who was indicted on similar charges.

Shortly before he was sentenced by Pauley, Waksal apologized to his family and employees of New York-based ImClone. "I am deeply distressed and so very sorry for my actions," he said.

He also apologized to people with cancer, saying he was "sorry for any delay I might have effected in the approval" of Erbitux.

A study released last week showed that in clinical trials Erbitux succeeded in shrinking tumors in patients with otherwise untreatable colon cancer. But the drug remains experimental.

ImClone had sought Food and Drug Administration approval for the drug in 2001. But Dec. 26 of that year, Waksal learned that the FDA was going to reject the application -- a development he knew could send ImClone's stock plummeting.

Waksal admitted to a scheme in which he tipped his daughter, Aliza, to sell her 39,472 ImClone shares, then worth $2.5 million. He said he did not tell her about the adverse FDA ruling.

The next day, Waksal tried to get 79,797 of his own shares transferred to his daughter's brokerage account at Merrill Lynch and attempted to sell them. But Merrill Lynch blocked the transaction because the shares were restricted and not available for sale.

In making his guilty plea, Waksal recounted how, after the SEC launched a probe of the sales, he suggested that his daughter lie to agency investigators. He also lied in his own testimony, he said.

Waksal also pleaded guilty to a bank fraud count not directly related to the insider trading. In that plea, he admitted forging a lawyer's signature on paperwork for a $44-million bank loan.

Sanders noted that under the 1987 revision of federal sentencing guidelines, convicts must serve 85% of their federal sentences before they can be released. For Waksal, that will mean serving more than six years in custody.

"When I was a prosecutor, the rule was that you'd serve a third to two-thirds of a federal sentence, with most people getting parole after about a third," Sanders said. "When people look at a seven-year sentence, it doesn't sound like much because everybody thinks parole still exists and that sentences are not for the full amount."

But for Waksal, "there's no parole, and he's going to do 85% of that time," Sanders said.

ImClone's stock closed Tuesday at $36.30 a share, up 84 cents, on Nasdaq.

Times staff writer E. Scott Reckard contributed to this report, and Times wire services were used in compiling it.

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