United States District Court
For the Northern District of Illinois
Securities and Exchange Commission,
Thomas M. Gibson, and Estate of Harry C. Krause, "J.R." Henry Conrad Krause, Executor,
J.R. Henry Conrad Krause, Individually, Elizabeth A. Kallal and Georgia R. Krause
Civil Action No.
Plaintiff, U.S. Securities and Exchange Commission (the "Commission" or "SEC") alleges as follows:
Nature of the Action
1. This "insider trading" case results from the conduct of Thomas M. Gibson (Gibson) and his long-time friend, Harry C. Krause (Krause). Gibson served as a member of the board directors of Cell Pathways, Inc. (CLPA), a publicly traded pharmaceutical company. Krause owned a substantial number of shares in CLPA. As a CLPA board member, Gibson learned that the Food and Drug Administration ("FDA") was not going to approve CLPA's new drug application for a proposed cancer cure. Before CLPA disclosed that information to the public, knowing that he had an obligation not to disclose that information, Gibson told Krause of this development. The next day, Krause sold all of his CLPA stock, thus avoiding losses of at least $400,000.00, which Krause would have incurred if Gibson had not given Krause the opportunity to trade on this "inside information" about CLPA.
2. By engaging in that conduct, Gibson and Krause violated Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78j(b)] and the Commission's Rule 10b-5 [17 C.F.R. § 240.10b-5] issued under the Exchange Act. Unless enjoined, Gibson will continue to engage in transactions, acts, practices, and courses of business similar to those set forth in this Complaint. Accordingly, the Commission seeks injunctions against future violations, disgorgement as described in its prayer for relief, and statutory civil penalties against Gibson.
3. Although Krause died after he traded on this inside information, his estate remains liable under the laws cited above for the losses that his trading permitted him to avoid. The SEC thus seeks disgorgement of those ill-gotten proceeds from his Estate.
4. Similarly, Krause's heirs are liable to repay the ill-gotten proceeds that Krause's Estate distributed to them. The SEC thus seeks them to disgorge the losses that Krause avoided.
5. The conduct of the Defendants, Gibson and Krause, violated the antifraud provisions of the federal securities laws. The SEC thus requests that the Court (a) enjoin defendant Gibson against further violations of these laws, (b) require Gibson and Krause's Estate to disgorge all profits realized from Krause's unlawful trading, plus prejudgment interest, and (c) impose a civil penalty on Gibson.
6. By engaging in such conduct, Gibson has demonstrated his substantial unfitness to serve as an officer or director of a publicly-traded company pursuant to Section 20(e) of the Securities Act [15 U.S.C. § 77t(e)] and Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)]. The SEC thus seeks the Court to issue a bar permanently enjoining Gibson from serving as an officer or director of a publicly traded company pursuant to Section 20(e) of the Securities Act [15 U.S.C. § 77t(e)] and Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)].
7. As distributees of Krause's Estate, Relief Defendants were unjustly enriched and received ill-gotten proceeds for which they gave no consideration. The SEC thus seeks that Relief Defendants disgorge all of the losses that Krause's insider trading avoided, the proceeds of which flowed to them as distributees of Krause's Estate, plus prejudgment interest.
Jurisdiction and Venue
8. The Court has jurisdiction over this action pursuant to Sections 21(e), 21A(d)(4) and 27 of the Securities Exchange Act of 1934 [15 U.S.C. §§ 78u(e), 78u-1(d)(4) and 78aa]. Certain of Defendants' and Relief Defendants' transactions, acts, practices and courses of business occurred within this District.
9. Defendants and Relief Defendants have, directly or indirectly, made use of the means or instrumentalities of interstate commerce and/or of the mails in connection with the transactions described in this Complaint.
The Defendants, the Relief Defendants, and Related Entities
10. Defendant Gibson, age 75, resides in Hinsdale, Illinois. At all relevant times until his resignation in May 2002, he served on the CLPA's Board of Directors.
11. Krause, who died in February 2002, resided in Bonita Springs, Florida. Krause was Gibson's college roommate and long-time friend. At their weddings, Krause was Gibson's best man once, and Gibson was Krause's best man three times. Krause's son, Relief Defendant, J.R. Henry Conrad Krause (J.R. Krause), is the Executor of Krause's Estate.
12. The distributees of the Krause's Estate are J.R. Krause and Krause's daughters, Relief Defendants, Elizabeth A. Kallal, a resident of Naperville, IL, and Georgia R. Krause, a resident of Lisle, IL.
13. CLPA is a Delaware corporation, with its principle place of business located in Horsham, Pennsylvania. CLPA 's principal activity is the discovery, development and commercialization of pharmaceutical products to prevent and treat cancer. CLPA has registered its common stock with the Commission under Section 12(g) of the Exchange Act, and it trades on the NASDAQ National Market System under the ticker symbol "CLPA." The market price for CLPA stock has recently averaged less than $1 per share.
Cell Pathway's Future Is Inextricably
Tied to the FDA's Approval of Aptosyn
14. By early 1999, the future of CLPA and the value of its common stock were tied inextricably to Aptosyn, a development stage pharmaceutical. By that time, CLPA had spent ninety-five percent (95%) of its research and development budget on developing Aptosyn. That amounted to an estimated sixty to seventy million dollars ($60 million to $70 million).
15. In or about August 1999, CLPA filed a new drug application ("NDA") with the Food and Drug Administration ("FDA"). If approved, the NDA would permit the company to sell Aptosyn to the public. If not, the future of the company would be uncertain, and value of its common stock severely diminished. By August 1999, CLPA's stock was trading in the range of $10 and $12 per share.
16. Since CLPA had filed its NDA for Aptosyn in August 1999, FDA guidelines required that the agency either render a decision on the Aptosyn NDA by late September 2000 or request more information from CLPA. The market would view the latter course as substantially reducing the value of CLPA's stock.
17. On June 27, 2000, the company issued a press release announcing that management expected a decision from the FDA in September 2000.
18. While it waited to hear the FDA's decision, CLPA took a number of steps to persuade investors of its favorable business prospects. It disclosed to the public that it had entered into partnerships to manufacture and distribute Aptosyn worldwide. A newspaper article reported that CLPA's Chief Executive Officer, Robert Towarnicki, said that he was optimistic and that he had a "gut feeling" that the FDA would approve its NDA for Aptosyn. As of June 2000, CLPA's common stock was then trading between $18 and $25 per share.
When Gibson Learned the FDA News, He Immediately Tipped Krause
19. In mid-September 2000, the FDA scheduled a conference call with CLPA's management for Wednesday, September 20, 2000. Anticipating the FDA's decision, CLPA management scheduled a conference call later that day to brief its board on the FDA's decision.
20. On September 19, 2000, CLPA gave its Board members, including Gibson, a special telephone number to join the conference call scheduled for September 20 at 5:30 p.m. Eastern Daylight Time (EDT).
21. At about 4:00 p.m., EDT on September 20, 2000 FDA representatives informed CLPA's management that the FDA had decided not to approve CLPA's NDA for Aptosyn (the "FDA news").
22. CLPA management then informed its board members of the FDA news at the previously scheduled conference call. That call began at 5:30 p.m., EDT and ended at 6:03 p.m., EDT. By participating in that call, Gibson learned the FDA news.
23. The FDA news constituted material nonpublic information. As a member of CLPA's board, Gibson owed to CLPA and its shareholders a duty not to use the FDA news for his own benefit and to maintain that news in confidence.
24. Later that evening, Wednesday, September 20, 2000, at 6:16 p.m. EDT and again at 6:18 p.m. EDT, Gibson telephoned Krause and revealed the FDA news to Krause.
Using this Inside Information, Krause Immediately Sold His CLPA Stock
25. At 6:26 p.m. EDT and again at 7:00 p.m. EDT on September 20, 2000, Krause tried to reach his broker by telephone.
26. When the broker returned Krause's calls later that evening, Krause ordered him to sell all 22,000 shares of his CLPA common stock immediately.
27. Early the next morning Thursday, September 21, 2000, before CLPA made the FDA news public, the broker executed Krause's order to sell his CLPA stock at approximately $27 to $28 per share.
28. The following day, Friday, September 22, 2000, after the market closed, CLPA announced the FDA news to the public.
29. The next Monday, September 25, 2000, after the FDA news had reached the public, the market price of CLPA's common stock sunk to $9.00 from the nearly $30 per share at which it had closed on the previous Friday, September 22.
30. By selling before the FDA news reached the public, Krause avoided losses of approximately $400,000.00.
31. In or about February 2002, Krause died. The losses he avoided, his "insider trading profits," passed to his estate and its distributees. His son, J.R. Krause is the Executor of Krause's Estate. The distributees of Krause's Estate are his children, the Relief Defendants, J.R. Krause, Elizabeth A. Kallal and Georgia R. Krause.
32. By his disclosure of the FDA news to Krause, Gibson knowingly or recklessly breached the duty of trust and confidence that Gibson owed to CLPA and its shareholders. Because Gibson knew that Krause owned a substantial number of CLPA's shares, Gibson could reasonably foresee that Krause would sell his CLPA stock upon learning of the FDA news. Furthermore, Gibson benefited by his gift of inside information to Krause, his close and long-time friend.
33. Krause knew, was reckless in not knowing, or should have known that, by telling him of the FDA news, Gibson was acting in breach of a duty that he owed to CLPA and its shareholders. Krause assumed Gibson's duty not to trade in CLPA securities after learning of the FDA news, which constituted material nonpublic information. Despite this duty, immediately upon learning that news, Krause placed an order to sell his CLPA stock. Relief Defendants did not give value for the distributions that they received from Krause's illicit trading, and thus they have no just claim to those proceeds.
(Against Defendants for Violations of Section 10(b) and Rule 10b-5 of the Exchange Act)
34. Plaintiff, SEC, hereby incorporates ¶¶ 1 through 33 with the same force and effect as if set out here.
35. In the manner described in ¶¶ 1 through 34, Defendants Gibson and the Krause Estate in connection with the sale of CLPA common stock, by the use of means or instrumentalities of interstate commerce or of the mails, directly or indirectly (a) employed devices, schemes or artifices to defraud; (b) made untrue statements of material facts or omissions of material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (c) engaged in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon persons in connection with the purchase or sale of a security, in violation of Section 10(b) of the Exchange Act [15 U.S.C § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] promulgated thereunder.
(Against Relief Defendants for Unjust Enrichment)
36. Plaintiff, SEC, hereby incorporates ¶¶ 1 through 35 with the same force and effect as if set out here.
37. In the manner described in ¶¶ 1 through 36, Relief Defendants J.R. Krause, Elizabeth A. Kallal and Georgia R. Krause received ill-gotten gains for which they gave no consideration and to which they have no legitimate claim.
Prayer for Relief
WHEREFORE, the SEC respectfully requests that this Court enter a judgment:
(i) Permanently enjoining Defendant, Thomas M. Gibson, his agents, servants, employees, attorneys, and those in active concert or participation with him, who receive actual notice by personal service or otherwise, from violating Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] promulgated thereunder;
(ii) Ordering Defendants, Thomas M. Gibson and the Estate of Harry C. Krause, to disgorge all insider-trading profits from the conduct alleged herein, with prejudgment interest;
(iii) Ordering Defendant, Thomas M. Gibson to pay a civil money penalty under the Insider Trading and Securities Fraud Enforcement Act of 1988, Section 21A of the Exchange Act [15 U.S.C. § 78u-1];
(iv) Ordering Relief Defendants, J.R. Krause, Elizabeth A. Kallal and Georgia R. Krause, to disgorge all insider-trading profits they received as distributees of the Estate of Harry C. Krause, plus prejudgment interest;
(v) Barring Defendant, Thomas M. Gibson, permanently from serving as an officer or director of a publicly traded company pursuant to Section 20(a) of the Securities Act [15 U.S.C. §77t (e)] and Section 21 (d) of the Exchange Act [15 U.S.C. § 78u (d)]; and
(vi) Granting such other relief as this Court may deem just and appropriate.
U.S. Securities and Exchange Commission, Plaintiff
James M. McHale, Trial Counsel
Thomas C. Newkirk
Cheryl J. Scarboro
Reid A. Muoio
Phone: (202) 942-4588 (McHale)
Fax: (202) 942-9569 (McHale)
Dated: September 24, 2002
John Birkenheier, Esq.
Midwest Regional Office
U.S. Securities and Exchange Commission
175 West Jackson Blvd, Suite 900
Chicago, IL 60604
Phone: (312) 886-3947
Fax: (312) 353-3381