Feds Say Waksal Warned Father, Daughter

Updated from 2:06 p.m. EDT

Sam Waksal, aware that ImClone Systems(IMCL Quote) was about to release devastating news on its lead drug, scrambled to get his father and daughter out of the company he founded through a frantic series of brief phone calls from New York to Florida and Idaho, prosecutors allege.

While named only as "tippee 1" and "tippee 2" in the criminal complaint that led to Waksal's arrest Wednesday, sources close to the defense identified them as his father Jack and daughter Aliza. In the case of Jack Waksal, the initial tip was followed by a torrent of calls to three different brokerages, ordering them to unload shares, the complaint states.

Waksal later told investigators he never told anyone to sell ImClone shares, earning him a perjury charge in addition to eight insider trading and conspiracy counts.

Waksal entered no plea at an arraignment in federal court in Manhattan Wednesday and was released on $10 million bail. He was arrested by FBI agents earlier in a dawn raid at his downtown Manhattan loft, charged with using advance knowledge that the FDA was about to reject an application for ImClone's cancer treatment Erbitux to help his family unload the soon-to-be-devalued shares.

(For a look at statements made by Waksal steadfastly supporting the company's Erbitux drug, click here.)

All in the Family

Specifically, prosecutors believe that on Dec. 27, 2001, Waksal's daughter, Aliza -- who her father characterized as almost completely dependent on her ImClone holdings -- sold 39,472 shares, yielding proceeds of about $2.4 million. Waksal also tried to park about 80,000 of his own shares in Aliza's account and sell them through her, but was shut down by brokerage officials who suspected the holdings were governed by ImClone restrictions, the complaint states.

That same day, Waksal's father Jack sold 110,000 shares of ImClone stock and an additional 25,000 shares on Dec. 28 worth a total of $8.2 million.

Prosecutors show records of phone calls between Waksal and his father on Dec. 26 as well as phone calls between Waksal and his daughter on the morning of Dec. 27, just prior to the sale of her stock.

A source close to Waksal said "there isn't a person around that doesn't call his father or daughter the day after Christmas."

In testimony before the Securities and Exchange Commission, Waksal said he had not spoken with his father on the night of Dec. 26 and didn't instruct any family members to sell ImClone stock. Prosecutors allege that he committed perjury and that he also lied in sworn testimony about his offshore accounts.

The government rarely prosecutes insider trading cases in criminal courts but apparently made an exception for the high-profile Waksal, who also faces shareholder suits alleging he misled investors about the prospects of his cancer treatment.

Soho Bust

According to his spokesman, four FBI agents arrested Waksal at around 6 a.m. in his Soho home. ImClone officials weren't immediately available to comment.

A source close to Waksal's defense called the evidence circumstantial. "The government misread that evidence and overreacted," this person said. "Dr. Waksal looks forward to the opportunity to defend himself against these charges."

Waksal was replaced as the company's chief executive by his brother Harlan last month.

ImClone's shares have plunged more than 80% since the FDA in December sent back its application for Erbitux, the cancer treatment, saying the clinical trials had been flawed. The shares were down another 4% to $7.24 in morning trading Wednesday.

Not So Good

The news also pressured shares of Martha Stewart Living Omnimedia(MSO Quote), sending them down 12% to $15.06. Stewart, who has known Waksal since her daughter dated him in 1987, reportedly sold 3,000 ImClone shares shortly before the bad news surfaced about Erbitux, although she hasn't been implicated in illegal dealings and denies she had insider information. Analysts said any taint to Stewart's homey image was liable to show up in her company's shares.

The SEC filed a civil complaint against Waksal outlining a similar plot to the criminal action. The commission is seeking an order requiring that Waksal disgorge the several million dollars in losses avoided by those family members he tipped, and that he pay civil penalties and prejudgment interest.

The FDA faxed ImClone the rejection letter after the market close on Dec. 28 and the news was released later that night. By the close of trading on Dec. 31, ImClone's stock price had dropped 16% to $46.46 from $55.25.

It also seeks an order permanently enjoining Waksal from violating the securities laws, and barring him from acting as an officer or director of a public company.