The ImClone case is about insider trading. Here is the background information regarding the case.

Sam and Harlan Waksal started ImClone in 1984. From there, in 1993, the brothers purchased the rights to the molecule C225. The molecule was discovered by Dr. John Mendelsohn at the University of California San Diego. C225 is an anti-cancer drug that can distinguish between cancerous cells and healthy cells. C225 would be able to shrink cancer to a surgically removable size. C225 would later be given the brand name Erbitux.

In May of 2000, Sam Waksal presents the case of Shannon Kellum at the American Society of Clinical Oncology. It was demonstrated that grapefruit sized tumors would be shrunk to the size of peas and then surgically removed.

A year later in September 2001, Bristol-Myers Squibb Co. agrees to buy a 20 percent stake in the company and for the rights to sell the cancer drug Erbitux in the U.S. and Canada. The tender offer valued ImClone at $70.00 per share.

On December 12 of 2001 ImClone and Bristol-Meyers meet with FDA on Erbitux, their last meeting with regulators before receiving official news the FDA would not review Erbitux. The FDA had concerns about Erbitux.

December 26, 2001 Waksal received a tip from his brother Harlan, that the FDA would reject the Erbitux application and the tried to sell 79,797 shares of ImClone. He was unable to complete the sale due to two different brokerages refusing to issue sale orders.

The next day family and close friends of Sam Waksal sell almost $3 million worth of stock, including Sam’s daughter Aliza and home style guru Martha Stewart, a friend of Sam Waksal. The stock closes at $58.30.

On December 28, 2001, ImClone announces that the U.S. Food and Drug Administration reject the application for Erbitux, saying the drug did not satisfy requirements. The stock begins a precipitous decline taking it down to the high teens.

On Jan 25, 2002, the U.S. Securities and Exchange commission and the Justice Department launch probe into ImClone and Waksal.

Feb 14, 2002 Waksal notifies the Securities and Exchange Commission for the first time of 50 trades he made in ImClone stock going back as far as 1992. These transactions should have been reported within months.

A few months later, Sam Waksal is arrested on charges he illegally acted on insider information in selling ImClone and by telling family members to do the same. By August Sam Waksal, already charged with insider trading, is indicted for obstruction of justice and bank fraud in a case that has rocked investor’s confidence. Waksal is accused of pledging ImClone securities he no longer owned to secure a $44 million loan and forging the signature of ImClone’s general counsel to fool the bank into believing he still owned the securities.

By August 14, 2002, ImClone sued Sam Waksal, claiming Waksal ordered the destruction of documents that may be important in a government investigation into the company.

The Imclone scandal is one of many scandals that show what can happen to a company if wrong and unlawful decisions are made. In this paper I will identify and define the ethical problems violated by certain employee’s at Imclone, which in part led to the scandal and imprisonment of several people. The first ethical problem and most obvious one to identify in this scandal is insider trading.

Illegal insider trading involves, “trading in a security (buying or selling a stock) based on material information that is not available to the general public” (Reh, 2010). This specifically means having certain information that the general public does not have either from inside sources or by being an insider. This would give people privileged information in order to help them make a financial decision. It is prohibited by the Security Exchange Commission because, “it is unfair and would destroy the securities markets by destroying investor confidence” (Reh, 2010). The stock market is driven by fair practices and confidence that the “man on the street” can have access to the same public information a corporate analyst has access to. The following examples describe instances of insider trading that have been reported to the SEC:

1. “Corporate officers, directors, and employees who traded the corporation’s securities after learning of significant, confidential corporate developments” (Astarita, 2010).
2. “Friends, business associates, family members, and other tippers of such officers, directors, and employees, who traded the securities after receiving such information” (Astarita, 2010).
3. “Other persons who misappropriated, and took advantage of, confidential information from their employers” (Astaria, 2010).

These are just a few examples of illegal insider trading and similarly describe what took place at Imclone with CEO, Sam Waksal. Sam discovered inside information that would lead to a drop in the company’s stock. Now, knowing and acting are two different things when it comes to insider trading. It is understood that certain people inside a company will know valuable information as regards to its stock going up or down. The criminal and unethical behavior comes when that person tells his friends and family members about that information. This is exactly what Sam Waksal did and this is what got him and the company into some major trouble.

Most public companies will limit the number of people who have access to the inside information. This is done to decrease the likelihood of insider trading. However, even if you have a small number of people on the inside, it will ultimately come down to the individual and the ethical standards to which they live their life by. It only took one man to start the insider trading scandal, and that’s not even all he did. Two other ethical problems that were indirectly related to Imclone involved Sam Waksal and his own personal ethics. His attempts at forgery and tax fraud did not hurt the company per sea, but helped confirm the type of unethical CEO that he was.

Forgery can be defined as, “the act or legal offense of imitating or counterfeiting documents, signatures, works of art, etc. to deceive” (Webster’s, 2009). This basically means falsifying something with the intent of misleading others so that you may appear to have done something truthful. With regards to ImClone’s CEO, it was reported that Sam Waksal forged a signature of the company’s general counsel, John Landes, in a statement pledging ImClone stocks in order to obtain money in loans from Bank of America. This was….

Fraud can be defined as, “something said or done to deceive” (Webster’s, 2009). Another definition, and one that more closely identifies personal ethics defines fraud as a, “person who deceives or who is not what he or she pretends to be; a cheat” (Webster’s 2009). Regarding Sam Waksal’s personal morality, he failed to pay sixty million dollars in personal income taxes on certain stock grants given to him by ImClone. He pretended for a long time to have paid these, when in reality he had not. It was only a matter of time until his fraudulent actions finally caught up with him.

As you can see, any one of the previous ethical problems can bring companies to scandalous ruin. What we see in all three of the problems is one man who decided to behave unethically. That is all it takes and that is why ethics is so important; especially for the men at the top.

Imclone employees and associates are clearly in violation of numerous laws and multiple ethical principles. One would think that a scandal involving accounting fraud and insider trading would not only damage a company initially, but result in long term detriment to the organization. There is a significant and gradual decline in the “shame on you” perception of the general public, as is evidenced by the most recent financial transactions of the company. Even with the barrage of media attention to the Imclone scandal, ethical attitudes appear to change over time.

Martha Stewart, the homemaker tycoon, was charged with and convicted of insider trading involving Imclone. She held numerous shares of Imclone stock and sold all holdings the day before the announcement from the Food and Drug Administration (FDA) announced that they would not approve Imclone’s drug, Erbitux, for cancer treatment. Predictably, shares of Imclone stock dropped significantly the day of the announcement. Martha Stewart sold all shares at fifty eight dollars per share and saved a predicted $40,000 by selling all holdings before the fall. Stewart claimed that she had a “verbal order” to sell all holdings if the stock dropped below $60 per share. However, one day before the announcement from the FDA, while she was traveling on her charted jet to Mexico for vacation, Stewart placed a phone call that lasted approximately eleven minutes to her stockbroker. Shortly thereafter, he sold all of her holdings. The next day the announcement was made and the rest as they say is history.

Martha Stewart, not Imclone, seems to be the one who received the most lasting negative impact from this scandal. MSO stock traded at a high of about $16 per share prior to the insider trading scandal. Once Martha Stewart was indicted and later convicted, MSO stock dropped to less than $8 per share. Currently, MSO stock is trading around $5 per share.

In 2002, Imclone shares fell as low as $5.85 per share. Imclone’s drug Erbitux was eventually approved and posted sales of 1.3 billion in 2007. In 2008, Bristol-Myers Squibb Company tendered an offer to purchase Imclone for $60 per share. Ironically, this is almost the same price point where Martha Stewart dumped her stock before the fall in 2001. Eli Lilly tendered an offer in 2009 for $70 per share, which totaled approximately $6.5 billion. The offer was approved and Eli Lilly purchased Imclone.

Multiple players crossed ethical boundaries during the Imclone scandal. These include individual investors (Stewart), Imclone senior leadership and stockbrokers. They knew what they were doing before they did it and they got caught. Martha Stewart is one of the principal reasons that this case got so much media attention. The Imclone scandal alone was not really that newsworthy nor was it much different than the multitude of other financial scandals during the early years after 2000. We have Mrs. Stewart to thank for bringing this to the forefront of America. For the business world, and the American Public in particular, the Imclone ordeal serves as an example of deceit, greed, insider trading and scandal. It also proves that if you knowingly choose to break the law, and if you get caught, the government will prosecute and you could serve time in prison. If you do not think it could happen to you, just ask Martha Stewart.