The SEC's "Insider Trading" Witch Hunt Against ImClone's Sam Waksal: Scapegoat for the Sins of the FDA

In late-17th Century America, unpopular women were captured, tortured, and murdered for the crime of practicing "witchcraft," as a scapegoat them for the world's problems. The Salem Witch Trials accepted so-called "spectral evidence" of alleged wrong-doing -- then punished the "perpetrators." The charges and trials were based on superstition, mysticism and religion -- and innocent people suffered for it. (1) Today there is an equally superstitious religion of hate used to punish innocents--a religion of envy and anti-greed--and an equally unjust set of "judicial procedures" used to persecute them, ranging from antitrust to insider-trading laws. The innocents are not women per se, but successful American entrepreneurs. In recent decades its victims have included Michael Milken and Bill Gates -- and most recently Dr. Samuel Waksal, founder of ImClone. Waksal recently pled guilty to charges of modern-day witchcraft (insider trading). Martha Stewart may well be next.

The injustice of "insider trading" rules and the FDA's regulatory policies -- which are based on ignorance and superstition no less than were the rules against "witchcraft" -- is illustrated in the ImClone case. ImClone is a mid-sized bio-tech firm that has applied the latest discoveries in the science of biology to create technologies to solve real world medical problems. ImClone's brainchild and major product is Erbitux, a drug aimed at making chemotherapy more effective. According to BusinessWeek:

ImClone's Erbitux is aimed at making chemotherapy more effective. These new drugs represent an important shift in cancer treatment. For much of the last 30 years, the advances have been incremental. Radiation and the tried-and-true chemo therapies each have their own toxic side effects. Recently, however, oncologists have developed ways to "sensitize" a tumor, making chemo or radiation more effective at shrinking a cancerous mass while minimizing damage to healthy cells…Erbitux is one of four or five drugs targeting a protein called epidermal growth factor receptor, which exists on the surface of cancer cells and plays a role in their proliferation. (2)

ImClone achieved a peak market value of $5.5 billion in December 6, 2001--up from $1.5 billion a year-earlier on the market's knowledge of Erbitux's value and on the expectation that not even bureaucrats would blithely ignore that value. They did.

Last December the FDA dealt a severe blow to ImClone shareholders by refusing even to review Erbitux. The firm's value has been heavily dependent on the successful launch of the drug. In doing this the FDA has not shown that Erbitux is unsafe; it has not even denied that the drug has proven effective in clinical trials. In fact, the FDA's bureaucrat-priests have conceded that Erbitux is beneficial -- but, they sniff, not beneficial enough:

Although Erbitux proved beneficial in extending some patients' lives, the FDA decided the single-arm trial was inadequate and refused to even consider the drug. Now, the company faces the prospect of re-doing the trials, which would add years and millions of dollars to the approval process. (3)

Erbitux has the potential to enormously help cancer patients. Even if the FDA had reviewed Erbitux -- and even if it had provided evidence that the drug was unsafe or caused some harmful side-effects -- there would have been no justification for preventing potential users from knowingly and willingly taking the risks (and potentially receiving the benefits) associated with the drug. As one op-ed writer has put the (tragic) point: "What does the FDA have against saving lives?" (4)

Figure One shows how ImClone's stock collapsed soon after the FDA's announcement late last December that it wouldn't consider Erbitux -- and how the stock price today is now nearly 86% lower.

Anticipating the FDA's move, Waksal realized that ImClone's stock might plummet. He still believed in Erbitux but couldn't trust the FDA to do it any justice. Although Waksal didn't sell any of his shares in the days before the FDA's announcement, he advised his daughter and father to sell some of their shares. They did so. ImClone's stock price had reached an all-time high of $75/share on December 6; but a week later it closed at $69.6/share -- more than 7% below its peak and 3% points worse than the broader market. Even before the FDA's irresponsible decision, the market -- and not Waksal alone -- was beginning to smell a rat at the FDA. The market was right.

After the close of trading on December 28th the FDA announced its refusal to review Erbitux; ImClone closed at $55.25/share. Since then more than $4.5 billion in shareholder wealth has been dissipated at ImClone. Waksal family members sold ImClone stock worth (at the time) about $150 million--or 3% of the total wealth that has been destroyed. But it's clear that shareholder wealth at ImClone was destroyed by the FDA--not by any other seller. Waksal certainly didn't "defraud" anyone. Every shareholder of ImClone knew full well -- or should have known -- that the firm's value was heavily dependent on Erbitux and that the drug's approval was at the mercy of an arbitrary FDA. Even the buyers of shares sold by the Waksal family should have known these risks.

A day-trader who bought the same ImClone shares sold by insiders (on December 28th or in the days prior) easily could have turned around and sold them the very next trading day (December 31th) -- after the FDA announcement was widely-known -- at a 13% (one-day) loss. Is the SEC trying to protect day traders? Those are the only discernable "losers" who could have "suffered" at the hands of the Waksals. An investor who bought the stock in August 2001 wouldn't have recorded any loss; and anyone who bought ImClone before May would have registered a gain -- by selling on December 31st -- even after the FDA's announcement and the Waksal family sales. Yes, ImClone's stock price fell 13% from December 28th to December 31st. But then it fell another 58% by the end of January, another 55% through the end of June (as the SEC launched its "investigation"), and another 11% from the end of June to yesterday. That's a year-to-date decline of 83%. The Waksal family -- who sold nothing in this time -- did not cause this 83% stock price decline. The FDA did.

As damaging as the FDA decision was, ImClone's stock price began to rise in March. But the SEC put an end to that, by launching an insider trading case against Waksal in April. Sam Waksal resigned from ImClone last May and was arrested last June. In July he was charged with violating "insider trading" laws. Observe that ImClone's stock began to plunge on two separate occasions: first when the FDA made its wealth-destroying decision in December and again after the SEC launched an "insider trading" case in April. The one-two regulatory punch effectively sabotaged both ImClone's major product and its major executive.

Instead of going to trial in a court of law -- and suffering the same injustice afforded the Erbitux "trial" --Waksal succumbed to the back-room arm-twisting of government prosecutors and pled "guilty" to six out of thirteen initial counts against him: for violating the SEC's vague and arbitrary regulations and "obstructing justice." Waksal now faces fines and a cruel-and-unusual punishment of 6-9 years in prison.

In addition to being persecuted for selling, the Waksal-family sellers have been ridiculed for it. According to says Ken Johnson, a legislative spokesman for the House Energy and Commerce Committee of the U.S. Congress (which investigated the ImClone case): ''If all of these people really believed that Erbitux was the next miracle drug, then why were they selling instead of buying?'' (5) Johnson's indifference to the facts of the case are patent. No matter how good a product may be, no shareholder can profit from it -- or rationally persist in holding a long position in the stock -- if regulators forcibly block its sale. Observe the injustice involved here. The FDA obstructed the launch of a product; then the SEC forced the termination of that product's primary creator. Yet it's not any regulator but the creator -- Sam Waksal -- who faces jail time for helping his family mitigate regulatory destructiveness.

The persecution of Sam Waksal -- for alerting his loved ones to the government's pending destruction of their wealth -- is a moral obscenity. By a rational code of morality Waksal's actions in regards to advising the sale of the stock were moral; he acted to protect his loved ones. But according to the U.S. government that's a crime--because it believes those who act on private knowledge which regulators claim should be public must suffer for the harm done by government policies. According to the government, Waksal should have waited until other people sold the stock before he let his family know -- or he should have told others first so they could benefit (or avoid the harm caused by the FDA) before he could.

By what right does the SEC prevent ImClone employees from benefiting from the knowledge they've gained by working in that company? By what right does the FDA prevent ImClone from selling its products to willing buyers? The answer is that the state has no such rights whatsoever--and it acts immorally when it proceeds to act upon those so-called "rights." Government bureaucrats have no moral right to block producers from selling drugs (or any other products) to willing consumers and no moral right, either, to block consumers from purchasing products.

There are, of course, legitimate laws against fraud -- whether product-based or securities-based. But there has been no proven fraud in the ImClone case -- other than the fraud of the FDA posing as a protector of the health and safety of patients or the fraud of the SEC posing as a protector of investors' health and safety. In fact, both of these agencies (and many others) act in ways that inflict harm on patients and investors. The government should prosecute fraud, but only by an objective, legal process in a court of law--and not an arbitrary, back-room regulatory process by a "rule of politicians." The legal burden should be on the government -- or the allegedly aggrieved party--to prove that a drug is dangerous and that its distribution would violate the rights of others.

Products, like firms and CEOs, should be considered innocent until proven guilty. But today businesses are compelled to prove to the government that their products are not unsafe and not ineffective. This not only presumes guilt rather than innocence.

In a free-market--which we do not have today--a biotech firm must only convince consumers that their drug products are safe. Who's more concerned with the consumer's health and happiness--the self-interested consumer, or some disinterested bureaucrat? The answer is obvious. Consumers--perhaps in consultation with their doctor--should decide on the value of products, since it is their lives--and not the bureaucrat's--that hangs in the balance. For the FDA to deprive consumers of such decision-making authority by hand-cuffing producers is a violation of the inalienable rights of producers and consumers.

Scores of regulatory agencies have been established in the past century on the false premise that product users or securities investors are incapable of properly judging such matters -- even with the help of professional advisers. But these same consumers and investors, as voters, indirectly choose the bureaucrats who make regulatory decisions. They judge bureaucrats or politicians by judging their views and decisions. If consumers and professionals who advise them are deemed unfit to judge or select some product (like Erbitux), what makes them any less unfit to judge or select bureaucrat-politicians who judge the product?

If an individual incorrectly selects a drug, or investment, only he suffers; but if a politician-bureaucrat makes a wrong decision which they coerce on everyone-- then everyone suffers. That's why socialist economies, like the former Soviet Union, fail so miserably and why capitalist countries prosper--less-regulated countries deliver higher quality products, and investments.

ImClone is private property, just as its creations are its property. Government interference in the right of ImClone to sell its products to willing, risk-taking consumers violates the basic principles that originally established America as a free society. To claim that the FDA can decide what ImClone does with its property is to regard ImClone as a slave and government as its master. Ownership of property is meaningless without control of property. To decree how Sam Waksal must use the information he discovered -- in this case knowledge of the FDA's intent to cripple the firm he founded and built -- is to decree that he, as a producer, must serve as the public's slave. To permit non-producers (like the FDA) to blithely sabotage or destroy wealth, at will and with complete immunity, is to make them the masters.

The essential principle of socialism, applied to the physical realm, is that property belongs to the "public" regardless of who undertook the effort to create the property. The insider trading laws are its intellectual corollary; if government can take control of the physical creations of your body, it is no great stretch to expect it will take control the intellectual results of your mind, i.e., knowledge. The result is the socialist corruption of the free market known as "insider trading."

In today's division-of-labor society, it is inevitable that some individuals will discover and act on information before (and better than) others do. Such differences are also the inevitable consequence of the fact that the human mind is individual by nature. Just as there's no such thing as a "collective mind," there is no such thing as "collective information." To grasp information an individual must expend effort; he must either create the information or discover it. After he does this, he may well choose to trade it with others or give it away in some act of charity (just as he may do with his tangible assets). But he should not be obligated (nor compelled by law) to do these things. Morally, he doesn't "owe" his knowledge to anyone. The primary moral obligation rests on others: they should be obliged to keep their hands off such assets and not destroy or steal them (or hire government to do so). The government should leave Sam Waksal and other "insiders" free to reap the benefits (or mitigate the harms) of information gained as a result of their position. They earned it.

Contrary to the Marxist dogma preached by the SEC, "inside" information does not "belong" to the "public" -- or to the government. If that were the case, we'd have public ownership of the means of production (socialism) -- because in today's "information economy," information is a crucial means to production.

"Inside" information about any company -- its trade secrets, strategies, etc -- are assets that belong solely to shareholders (and to shareholding-executives too, if other shareholders approve of such a policy). Only a firm's owners have the moral right to decide how their employees can use such information. Government-bureaucrats should have no say in the matter as no fraud is involved--and as long as a firm discloses its insider-information policy no fraud is involved.

Under the principles of agency law, firms may use "inside" information as employee compensation; or the company through its bylaws can restrict its use (only then can "insider trading" be punished by owners as a breach of a contractual obligation in a civil--and not a criminal--court.[6]). In a free-market, investors choose the kinds of companies they want to invest in (rather then have the SEC choose for them): a company which allows insider trading, or a company that prohibits it, or a company somewhere in-between. Let a million flowers bloom.

At the root of the false claim that the creators of knowledge and wealth owe it to the non-creators is the anti-American, ethical code of altruism -- of allegedly-noble self-sacrifice. In Marxist terms this means that wealth and information must be plundered "from each according to his ability" and distributed "to each according to his needs." The producer has the ability, i.e., "greed"--the "public" has a need--the inalienable rights of the producer be damned.

If anyone deserves to be put on trial today -- to be cuffed, "perp-walked," indicted, convicted, and incarcerated -- it is the regulators, those dictators who routinely violate property rights and destroy wealth (and careers) in the process. These are the witch-hunters of the 21st Century, the politicians and bureaucrats who make up "laws" against producers -- and loyal family men -- like Sam Waksal. These witch-hunters are the real perpetrators, against which real evidence can be amassed and real justice can be done. Will true justice be served? It's unlikely. The underlying philosophical ideas that pervade American culture must change for the better.

But until they do change, one must realize that the FDA's irresponsible dismissal of Erbitux shouldn't have occurred in the first place. But having occurred -- and having clearly destroyed wealth -- it adds insult to injury for the SEC to scapegoat and jail the victim.

The author thanks Richard Salsman for comments and suggestions.

Updates: ImClone Vindicated? (May 30, 2003), Swiss Approves ImClone's Cancer Drug That Was Banned by the FDA (December 8, 2004), ImClone Vindicated: Sort Of (April 27, 2004)



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