Where are market cops when we need them?
By BRIAN MILNER
Tuesday, January 22, 2002 – Print Edition, Page B23
Washington politicians are demanding answers and heads
in the Enron debacle. State lawmakers are launching suits
with the zeal of ambulance chasers in an effort to recover hundreds of millions lost
by their pension funds. Police are sifting through what's left of the shredded paper
trails in search of crooks; and the chairman of the U.S. Securities and Exchange
Commission has suddenly found religion when it comes to auditing.
All of the official sound and fury that has erupted in the wake of the worst stock
market scandal in modern times is supposed to make us feel good about the
transparency, strict regulation and basic honesty of the world's busiest capital
markets.
Sure, the occasional rotten apple shows up in the American barrel, but look how
swift the pursuit is, and how terrible the punishment. People will pay, heads will roll
and it will never, never happen again. Until the next time.
The sad truth is that Enron is not an isolated exception -- apart from its
unprecedented size and scale and the fact that every one of the checks and balances
designed to protect the investing public failed to do the job.
The reality is that while the bulk of the players at the vast U.S. capital markets table
are free of taint, there are plenty of people who play fast and loose with the rules.
And why not? They can often get away with it. And even when they get caught, they
usually get off pretty lightly. What's a little embarrassment, a few legal bills and the
occasional small financial penalty when millions of dollars are at stake?
Just the other day, Donald Trump's casino company reached a settlement over what
regulators said was misleading information given to the public . . . in 1999. The SEC
trumpeted the case as the first stemming from a crackdown on the growing
corporate habit of massaging financial results to make things look better than they
really are.
Yet Trump Hotels & Casino Resorts paid no financial penalty -- unlike the investors
who rushed to buy the stock on the apparent good news. In fact, the company didn't
even have to acknowledge that it had done anything wrong. It merely promised not
to do it again.
This, despite the fact that the actions of three senior officers (but not Mr. Trump,
who was chairman at the time) caused the company to violate "the anti-fraud
provisions of the Securities Exchange Act by knowingly or recklessly issuing a
materially misleading press release."
Then we have the developing saga of ImClone Systems.
While Enron has been grabbing all the headlines, ImClone is coming up fast on the
outside. The once hot biotech firm faces a rash of shareholder lawsuits and a probe
by one of the same congressional committees investigating Enron. News of the
investigation and other concerns about the company sent the stock tumbling 30 per
cent on Friday. Its stock has plunged to $21.15 from a high of $75.45 just six weeks
ago.
At issue is whether ImClone misled investors about Erbitux, a potentially promising
treatment for colorectal cancer. When its stock was still riding high, the company
learned that the U.S. Food and Drug Administration had refused to look at its
application to market the drug. The company revealed the FDA's concerns on Dec.
28.
The FDA had earlier agreed to a quick review once it accepted the application, and
analysts expected that the potential blockbuster drug would hit the market by
midyear.
Further buoying investor optimism was the fact pharmaceutical giant Bristol-Myers
Squibb had acquired a 20-per-cent stake in the company in September, just to get
its hands on the experimental drug. Bristol-Myers, which paid $70 a share for its
stake, now faces hard questions about the quality of its due diligence. But it's big
enough to take care of itself, and it can afford to wait for results.
Biotech is an inherently risky game, but it becomes a lot riskier when investors
don't have access to material information.
The FDA's rejection letter revealed that ImClone's testing procedure was flawed and
that new clinical trials might be required. The company says it remains confident in
the drug and that the FDA's questions concerned data collection. But the fact is that
approval might be delayed for a considerable time, something investors had a right
to know.
Another point worth noting about ImClone: The company's chief executive officer,
Samuel Waksal, and his brother, Harlan, the chief operating officer, picked up more
than $110-million (U.S.) from tendering shares to Bristol-Myers. Harlan Waksal
pocketed another $50-million from share sales in December.
Now the Waksals, like Enron's honchos, face a public grilling by a bunch of
Washington politicians. This admittedly cruel form of torture may turn out to be the
worst punishment meted out to any of them by the supposedly tough market cops
south of the border.
bmilner@globeandmail.ca
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