CEO SUMMARY: Justice has been meted out to six individuals accused of criminal fraud in the Impath,Inc. case. During June, sentences were pronounced for former President and COO Richard P. Adelson and several other defendants. Adelson will serve 42 months in prison, pay a $1.2 million fine, and was directed to pay restitution totaling $50 million. The other defendants received lesser sentences.
IN A COURTROOM IN NEW YORK CITY last June 13, 2006, four of the six defendants in the IMPATH, Inc. case received their sentences. The sentencing means that all of the original defendants have been convicted under federal criminal statutes.
The indictments of these six ex-employees of Impath were announced on March 30, 2005. As explained in the indictments, the defendants had conspired to manipulate the company’s finances to produce as much as “$64 million in phantom revenue between the years 1999 and 2002.”
When the fraud was discovered and became public knowledge in the summer of 2003, the company’s stock price dropped 88%. Losses to investors approached $260 million. NASDAQ delisted the company and, on September 29, 2003, Impath filed a Chapter 11 bankruptcy action. (See TDR, September 29, 2003.)
First to be convicted was Impath’s ex-Chairman and CEO, Anu Saad, Ph.D. On September 21, 2005, Saad dropped her not guilty plea and pled guilty to two counts of soliciting proxy statements containing false information and one count of “knowingly failing to implement a system of internal accounting controls.”
Saad admitted that, in these proxy statements, she had failed to disclose compensation paid to her by Impath. These were personal expenses charged to an Impath corporate credit card and paid for by Impath. Totaling approximately $120,000, Saad had spent corporate funds for furniture, electronic equipment, beauty products, artwork, and personal travel.
No Accounting Controls
The second indictment was because Saad, as CEO, “knowingly failed to implement a system of internal accounting controls at Impath” that would have prevented the financial manipulation of Impath’s actual revenues and other financial details.
Saad’s sentencing came on January 17, 2006. She was given three months in prison, two years of supervised release, required to pay a $6,900 fine as well as a special assessment of $300. Before her sentencing, Saad told the courtroom, “I just want to say how sorry I am for my conduct.”
Saad’s willingness to plead guilty to these three counts was probably a lucky decision, given the relatively light sentence she received. That’s because of the sentence received by ex-President and COO Richard P. Adelson, who decided to fight his indictment and lost a jury trial.
Adelson found himself facing 12 counts. These included charges for conspiracy to commit securities fraud, to make false statements in SEC filings, and to falsify Impath’s books and records. His trial commenced on January 30, 2006. It lasted two weeks and ended on February 16, 2006.
Convicted On Five Counts
The jury acquitted Adelson on seven counts, including two charges of soliciting a false proxy statement. But Adelson was convicted on the remaining five counts. His attorney announced that Adelson would file an appeal.
Adelson’s sentencing was scheduled for May 30, 2006 and he faced the possibility of life in prison, given the maximum sentence possible.
At the sentencing, one reporter present wrote, “Weeping, an emotional Adelson apologized to the court and begged the judge for a more lenient sentence. ‘Please allow me to continue to make a contribution,’ Adelson said. ‘I am asking your honor for a second chance.’”
He was also quoted in other news reports as saying “I have made some very serious mistakes and have failed miserably at my life’s goals. I only blame myself and take full responsibility for that.”
U.S. District Court Judge Jed Rakoff, who had also sentenced Anu Saad, noted that, while federal sentencing guidelines recommended a term of life in jail for Adelson, his crimes were not comparable “to the kinds of situations that have led to 20- and 25-year prison terms.” This was a reference to the multi-billion dollar frauds, and subsequent convictions, in the Enron, WorldCom and similar cases.
Prison, Fine, Restitution
Adelson received a sentence of 42 months in prison, a $1.2 million fine, and an order to pay restitution of $50 million. Judge Rakoff acknowledged that Adelson would likely only pay a small portion of that restitution.
Just two weeks after Adelson’s sentencing, it was time for the remaining four Impath defendants to receive their sentences. These individuals were: David J. Cammarata (former Chief Financial Officer), Peter Torres (former Vice President of Finance), Karin Gardner (former Controller), and Kenneth Jugan (former National Billing Director).
All Had Pled Guilty
All four had pled guilty to their indictments prior to the March 30, 2005 announcement by federal prosecutors of the indictments against Saad and Adelson. Because some were cooperating with the prosecution, their sentencing was scheduled to take place after the cases against Saad and Adelson had been adjudicated. The sentences were as follows:
Cammarata pled guilty to five counts. He was sentenced to one month in jail for each count, to be served concurrently, and five years of supervised release.
Torres pled guilty to four counts. He was credited with time served and put on three years of supervised release.
Gardner pled guilty to four counts. She received credit for time served and was given three years of supervised release.
Jugan pled guilty to three counts. He was credited with time served and received three years of supervised release.
In parallel with federal prosecutors, the Securities and Exchange Commission (SEC) brought civil actions against these four individuals. On September 29, 2005, Cammarata, Torres, Gardner, and Jugan consented to permanent injunctions, including a lifetime ban on serving as an officer or director in a public company. Cammarata was also barred from appearing before the SEC as an accountant.
A seventh ex-Impath employee had agreed, in early 2005, to a civil settlement with the SEC. Former Impath Vice President Robert McKie, without admitting or denying SEC allegations, agreed to settle his case by paying a $150,000 penalty and returning about $100,000 in bonuses, with interest.
Financial Fraud Case
With the sentencing of all the Impath defendants, federal prosecutors closed the books on one of the more spectacular frauds ever to occur in the laboratory industry. The most useful lessons to be learned from the fraud at Impath are at least three.
First, corporate culture counts. It is not a coincidence that companies like Procter & Gamble and Johnson & Johnson are universally respected. Customers know when a company is doing the right thing.
Second, leaders must be capable and ethical. Good leadership is a major factor in business success.
Third, it is essential to have effective controls on management and operations. In the case of Impath, people with financial incentives had control or influence over the reporting of factors upon which their bonuses and incentives were based.
Crime Doesn’t Pay for Seven Ex-Impath Execs
NO ONE WILL EVER KNOW ALL THE REASONS that motivated seven managers to manipulate the financial statements of IMPATH, Inc. during the years 1999-2002. Here’s a summary of criminal and civil actions that resulted from federal charges.
■Anu Saad, Ph.D. (former Chair and CEO): pled guilty to three counts. Sentence was three months in prison, two years of supervised release, $6,900 fine, $300 special assessment.
■Richard P. Adelson (former President and COO): jury trial, convicted on five counts, acquitted on seven counts. Filing an appeal. Sentence was 42 months in jail, $1.2 million fine, $50 million restitution.
■David J. Cammarata (former Chief Financial Officer): pled guilty to five counts. Sentence was one month in jail for each count, to be served concurrently, five years of supervised release.
■Peter Torres (former Vice President of Finance): pled guilty to four counts. Credit for time served, three years of supervised release.
■Karin Gardner (former Controller): pled guilty to four counts. Credit for time served, three years of supervised release.
■Kenneth Jugan (former National Billing Director): pled guilty to three counts. Credited with time served, three years of supervised release.
■Robert McKie (former Vice President): civil settlement with the SEC, without admitting or denying SEC allegations, paid $150,000 penalty and returned about $100,000 in bonuses, with interest.
In SEC civil actions, Cammarata, Torres, Gardner, and Jugan consented to permanent injunctions, including a lifetime ban on serving as an officer or director in any public company.