A:

On December 28, 2001, the FDA announced that it was rejecting ImClone's new cancer drug, Erbitux. The drug represented a major portion of ImClone's pipeline, so the company's stock took a sharp dive. On the surface, it was just another example of legislative risk in the pharmaceutical industry. But closer scrutiny revealed a number of discrepancies. Leading up to the FDA announcement, many friends and family members of Samuel Waksal, the company's founder, sold their holdings. In short, it looked like Waksal had tipped off his people.

Among the people who showed uncanny insight into the FDA approval process was homemaking guru Martha Stewart, who had sold 4,000 shares on December 27. At the time, the stock was trading just below $60 and Stewart collected nearly $250,000 on the sale. Over the following months, the stock plummeted to just over $10. Stewart claimed to have had a pre-existing sell order with her broker, Merrill Lynch's Peter Bacanovic, so the Department of Justice launched an inquiry. The story fed off of Stewart's fame and she was forced to resign as CEO of her own company, Martha Stewart Living Omnimedia.

As more insider trading allegations surfaced and further legal actions were announced, ImClone shares fell below the $10 mark. In 2003, Waksal was arrested and sentenced to over seven years in prison and fined $4.3 million. In 2004, Stewart and Bacanovic were also found guilty. On July 16, Martha Stewart was sentenced to the minimum of five months in prison and fined $30,000. She was released in 2005 and returned to her company as "founding editorial director". ImClone recovered from the scandal and the drug Erbitux gained FDA approval in a second trial. Former corporate raider Carl Icahn scooped up a controlling interest in the company in 2006 and wiped out much of the old board of directors to become the new chairman.

For more on this topic, read Uncovering Insider Trading and Measuring the Medicine Makers.

This question was answered by Andrew Beattie.

RELATED FAQS
  1. Who are the most famous people convicted of insider trading?

    Learn about some famous people who were convicted of illegal insider trading and find out about the reasons for their criminal ... Read Answer >>
  2. How does government regulation impact the drugs sector?

    Learn about how drugs are regulated by the U.S. government as well as the role of the Food and Drug Administration during ... Read Answer >>
  3. What countries comprise the majority of the global drugs sector?

    Find out which countries are the largest producers of pharmaceutical products in the world and why the United States dominates ... Read Answer >>
  4. How does the profit margin compare for a generic drug versus a brand name drug?

    Learn how the profit margins compare for generic drugs and brand-name drugs. Brand-name drugs cost three to four times more ... Read Answer >>
  5. Is the drugs sector better suited for active or passive investment?

    Learn how passive investing can make a person good money in the drugs sector, but shrewd active investing can make a person ... Read Answer >>
Related Articles
  1. Insights

    Why Insider Trading Is Bad for Financial Markets

    Insider trading can come in many forms, some of them even legal, with the benefits and costs often debated by practitioners and academics alike.
  2. Trading

    Top 4 Most Scandalous Insider Trading Debacles

    Here we look at some of the landmark incidents of insider trading.
  3. Managing Wealth

    Infamous Female Financiers

    These fabulously affluent females twisted, bent and broke the law to bring home the bacon.
  4. Insights

    Pharmaceutical Sector: Does The FDA Help Or Harm?

    We look at how the FDA affects the pharmaceutical industry, and how investors can avoid the pitfalls.
  5. Investing

    Drug Approvals Fell to Six-Year Low in 2016

    New drug approvals dropped to modest levels in 2016 following highs in 2014 and 2015.
  6. Investing

    WWE Makes a Bid to Broaden Its Audience

    When John Stewart stepped away from The Daily Show after 16 years as host, speculation as to where he would land next was rampant. There were lots of destinations suggested, with pretty much ...
  7. Investing

    Evaluating Pharmaceutical Companies

    Learn how to find a healthy pharmaceutical investment in a market full of weak drugs.
  8. Investing

    Macy's and J.C. Penney Settle Martha Stewart Suit

    In what may be the final chapter of the saga that was Ron Johnson's tenure as CEO of J.C. Penney (NYSE: JCP), the retailer and rival Macy's (NYSE: M) have reportedly settled a lawsuit over the ...
  9. Investing

    Could the FDA Hiring Freeze Make Drugs More Expensive?

    Drug approvals by the resource-constrained FDA will take longer, leading to longer waits for the approval of cheaper alternatives.
  10. Financial Advisor

    The Unsung Pioneers Of Finance

    We all know names like Rockefeller, but there are other influential pioneers of finance in America's history.
RELATED TERMS
  1. Insider Trading

    The buying or selling of a security by someone who has access ...
  2. ImClone - IMCL

    A publicly-traded biotechnology company marketing products in ...
  3. New Drug

    A new medication or therapy that has not been used before in ...
  4. Food And Drug Administration - FDA

    A government agency established in 1906 with the passage of the ...
  5. Insider

    A director or senior officer of a company, as well as any person ...
  6. New Drug Application (NDA)

    The final step formally taken by a drug sponsor, wherein it applies ...
Hot Definitions
  1. Price Elasticity Of Demand

    A measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price ...
  2. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  3. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center