By Joe Nocera
The day after Christmas 2001, Sam Waksal, the chief executive of ImClone Systems, began selling off shares in the company after learning that the Food and Drug Administration had rejected its application for a key cancer drug.
As it happens, Waksal’s broker, Peter Bacanovic, also served as Martha Stewart’s broker, and because she and Waksal were friends, she had ImClone in her stock portfolio. Bacanovic then called Stewart, gave her the news about the drug’s failure and, with her agreement, began selling her ImClone stock as well.
Perhaps you recall how this turned out? In 2002, Waksal pleaded guilty to securities fraud and related charges. He served the next six years of his life in prison.
In 2004, Stewart and her co-defendant Bacanovic were found guilty after the most-highly publicized insider-trading trial since, well, maybe forever. Each was sentenced to five months in prison.
I’ve since gotten to know one of the parties involved: Waksal. He is, as he’s often described, a brilliant man in many ways. What happened in late 2001 was a moment of panic; had he been thinking clearly he would surely have realized that when a CEO dumps his own company’s stock days before some bad news is released, it never ends well.
The Securities and Exchange Commission has proved over and over again that it can suss out insider-trading violations that are far more complex - and hidden - than the ImClone case.
Which brings me to the insider-trading indictment involving Rep. Chris Collins, R-N.Y. (He was the first sitting member of Congress to back Donald Trump for president.)
Collins, a former Westinghouse Electric executive with an estimated net worth of $70 million, first attracted attention for his stock tips when it became known that he had tipped off Trump’s first secretary of health and human services, Tom Price, about Innate Immunotherapeutics Ltd., a tiny Australian company that Collins had invested in and served on the board.
Price was a congressman when he bought the stock in a private placement - at a discounted price of 18 cents a share.
When his elevation to Trump’s Cabinet forced him to unload the stock, he made an absolute killing. It had risen to $1.77 - in no small part because of the news that several important congressmen owned it. This all transpired in 2015 and 2016, and while it was a sleazy bit of business, it probably wasn’t illegal.
According to Wednesday’s indictment, Innate Immunotherapeutics had everything riding on one drug - just like ImClone in 2001. The drug was in clinical trials. In June 2017, the trial was officially declared a failure - just like ImClone!
Thus ensued a three-day window between the time the board (including Collins) heard the news and the time the news became public.
And what happened during those three days? Collins’ son Cameron Cameron sold 1.3 million shares, after being tipped off by his father, according to the indictment.
Then Cameron Collins gave the information to his future father-in-law, Stephen Zarsky. Cameron Collins also told his fiancée and his future mother-in-law. They had all originally bought the stock on Cameron’s say-so, and now they all dumped the stock on his say-so. The indictment says that in all, they saved $768,000 in losses. (That’s going to be some wedding, don’t you think?) They are also said to have lied when questioned by investigators.
How Collins and company thought they were going to get away with this is beyond me. One of the reasons prosecutors bring celebrities like Martha Stewart to trial is to serve as an object lesson, so others can see what happens when you get caught. The bad guys, for their part, know that they have to be very clever to pull off an insider-trading scheme - and even then they don’t get away with it most of the time.
Chris Collins is 68, which means he would have been 54 when Stewart went on trial. My guess is that Zarsky is more or less the same age. Yet these trades executed in the immediate aftermath of a drug’s rejection could not have been more bone-headed. They were as simple-minded, as panicked and as easy to track down, as Waksal’s and Stewart’s 17 years ago. You have to ask yourself: What were they thinking?
If Collins and the others wind up in prison it will be for breaking the insider-trading laws. But that’s only because stupidity itself is not against the law.
Jim Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. He is co-author of “Indentured: The Inside Story of the Rebellion Against the NCAA.”