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.

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