NEW YORK – Two friends of the former CEO of ImClone Systems Inc. (IMCL), including a high-ranking doctor at New York's Memorial Sloan Kettering Hospital, were arrested on Wednesday on charges of insider trading based on a tip from former Chief Executive Samuel Waksal (search) in late 2001.
Federal prosecutors announced the arrest of Zvi Fuks, chairman of the Department of Radiation Oncology at Memorial Sloan Kettering (search), and Sabina Ben-Yehuda, who had worked at an investment vehicle set up by Waksal to invest in start-up biotechnology companies.
Fuks had been a member of ImClone's Scientific Advisory Board in 2001.
"We believe the charges are entirely without merit," said Stephen Fishbein, a lawyer for Ben-Yehuda. He said they planned to vigorously fight the complaint. A lawyer for Fuks could not immediately be reached for comment.
Waksal is currently serving a more than seven-year prison term for insider trading. His friend Martha Stewart (search) was released from prison on Friday after serving a five-month prison term for lying about her suspicious trade in ImClone shares.
Stewart, the lifestyle trendsetter who built a media empire, is now serving five months of house arrest.
The criminal complaint, filed in Manhattan federal court, charges Fuks and Ben-Yehuda with securities fraud-related counts that carry a maximum prison term of 15 years and fines of $1.25 million. The complaint states that the two defendants had a very close personal relationship.
They were also charged in a related civil case filed by the Securities and Exchange Commission (search).
The accusations stem from news that Waksal had learned on Dec. 26, 2001, that the U.S. Food and Drug Administration would reject ImClone's cancer treatment drug Erbitux.
The complaint charges that before the market opened on Dec. 27, Waksal tipped Ben-Yehuda that he had heard that it was highly likely that ImClone would receive the bad news from the FDA and that he believed it would cause ImClone's share price to drop.
Ben-Yehuda then tipped Fuks, the complaint said.
Fuks placed an order to sell all of his 89,173 shares of ImClone in a trade that yielded proceeds of about $5.3 million. Ben-Yehuda sold 1,178 shares for about $73,453, according to the complaint.
On Dec. 28, ImClone received the FDA's denial and the company issued a press release on the close of business that day. The next trading day ImClone's shares fell by about 16 percent.
Waksal was sentenced to serve 87 months in prison after pleading guilty in October 2003 to criminal charges of insider trading. He fashioned his plea to omit conspiracy charges that alleged his father, a Holocaust survivor, and his daughter knew they had received illegal tips before selling their ImClone shares.
Stewart and her former broker, Peter Bacanovic, were convicted in March 2004 for conspiring to lie about the reasons behind her suspicious sale of ImClone shares on Dec. 27, 2001.