Tsao pleads guilty to insider trading and perjury

Ex-official of MedImmune faces up to 21 months in prison, plus fines

September 18, 2004|By William Patalon III | William Patalon III,SUN STAFF

WASHINGTON - As a respected, top-tier executive at MedImmune Inc., Eric I. Tsao was privy to secret negotiations with other public companies on deals that were virtually certain to shoot the shares in those firms skyward once the news became public.

For Tsao, a Ph.D. chemical engineer and a trusted longtime employee, this inside information represented an opportunity for personal gain: On three occasions between September 1999 and December 2001 - and with increasing daring - the MedImmune executive traded ahead of that news, hiding his transactions in an Internet account he had opened in the name of his father, a retired sea captain who lives in Taiwan.

Tsao's third foray into the insider-trading arena netted him nearly $150,000 in illegal profits, investigators said. Between 1998 and early 2002, Tsao used more than $435,000 from his brokerage account to pay household and medical expenses.

Tsao, now 44, is out at MedImmune and faces 15 to 21 months in a U.S. prison plus fines after pleading guilty yesterday to two charges - of insider trading and perjury - under a plea agreement with federal prosecutors.

He also settled a civil lawsuit brought by the Securities and Exchange Commission, an action that calls for him to forfeit all his illicit profits and to pay penalties of up to $330,000.

A stocky, well-groomed, bespectacled man, Tsao stood calmly with his hands at his side at the courtroom lectern, answering the litany of questions posed by U.S. District Judge Henry H. Kennedy Jr. before entering his plea on the two criminal charges.

"I plead guilty, your honor," Tsao said to the judge.

Tsao's attorney, Richard Rossman, waved reporters away after the hearing. Sentencing is set for Jan. 14.

Not long ago, Tsao was one of the rising stars at MedImmune, one of the state's leading biotechnology companies, which he joined in 1992, moving up the management ranks. In September 2000, the Gaithersburg company's CEO recognized him as a valuable contributor in announcing his promotion.

By then, Tsao was well into his illicit scheme. He had opened the Internet trading account used for his trades at discount broker Charles Schwab & Co. in December 1998, listing as the sole owner his father - then a 70-year-old retired sea captain who lived in Taiwan and had "a limited ability to read or communicate in English," according to SEC documents.

Tsao used 3,400 MedImmune shares worth $330,000 to open the account.

Tsao's position of trust within MedImmune presented the first bit of inside information in mid-September 1999, when he learned his employer was negotiating to buy U.S. BioScience.

The highly confidential talks between the two firms were at a very advanced stage, and MedImmune sent a hand-picked team that included Tsao to the Netherlands to inspect a production facility the target company operated.

"At 12:23 p.m., on Sept. 16, 1999 - within hours (if not minutes) of learning about MedImmune's advanced-stage acquisition talks with U.S. BioScience - Tsao, using that information," placed an order for 5,000 shares of U.S. BioScience common stock at $11.50 per share, the SEC said in its civil action.

Tsao's first order was only partly filled: 3,500 shares at $11.50. The rest of that order expired, unexecuted, at day's end. Tsao came back the next day with another order for 2,500 shares, again at $11.50. By day's end, he held 6,000 shares of U.S. BioScience.

Three business days later, MedImmune publicly announced an agreement to purchase U.S. BioScience. By early October, Tsao sold out his shares, garnering a profit of $18,000.

On Nov. 14, 2000, shortly after Tsao had been promoted, MedImmune signed a confidentiality agreement with ImClone, the same biotech firm whose stock sale ensnared Martha Stewart.

The two firms were looking to jointly manufacture ImClone's lead cancer-drug candidate; just one day later, he attended a meeting between the two companies.

On Nov. 29, Tsao used an office computer to purchase 2,000 shares of ImClone at $40.25, and a day later to buy 2,000 shares of MedImmune at $50.125. While the talks between these two firms ultimately broke down, ImClone consummated a very similar deal with another firm about a year later, yielding $50,475 for the account, investigators said.

However, because the profit was made on a deal that didn't involve MedImmune, these were not deemed to be illegal profits, authorities said.

Successful in those ventures, Tsao tried again - and it was that attempt to profit from inside information that proved his undoing, prosecutors say.

On Nov. 21, 2001 - the day before Thanksgiving - Tsao learned from information he heard at work that MedImmune was in confidential acquisition negotiations with Aviron, a publicly held biotech firm specializing in vaccines, including the one that would become MedImmune's nasal spray flu vaccine FluMist.

The day after Thanksgiving, Tsao placed an early order to purchase 5,000 shares of Aviron at $35.98, and followed it minutes later with an order for another 5,000 shares.

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