Risk Management

“Failure to Question” Snags Impath Exec

An appeals court ruled that the former president knew the cancer-data company was not performing well, but gave the SEC a different story.
Sarah JohnsonAugust 17, 2007

A three-panel judge has affirmed a former corporate president’s conviction for conspiracy, securities fraud, and filing false statements with the Securities and Exchange Commission.

More than a year ago, Richard Adelson, who presided over cancer-data company Impath before it went bankrupt, was sentenced to three-and-a-half years in prison for his role in Impath’s undoing. Adelson, along with other executives, was accused of inflating the company’s revenues through improper accounting. Former Impath CEO Anuradha Saad was sentenced to three months in prison on lesser charges, and four other executives pleaded guilty to related criminal charges, according to the Associated Press.

In rejecting Adelson’s petition, the U.S. Court of Appeals for the Second Circuit said the lower court did not err in giving the jury a “conscious avoidance” charge or in denying the defendant’s motions to dismiss the false-documents charge. The judges also said Adelson had not substantiated his claim that the charges alleging proxy fraud, which were later dropped, tainted his trial.

Regarding the conscious avoidance argument, the judges explained that this instruction to the jury allows it to find a defendant had culpable knowledge of a fact if there is evidence that he intentionally avoided finding out more information. In Adelson’s case, the judges wrote in their opinion that he had heard about Impath’s declining performance, and heard and read information about the company’s varying revenue numbers; however, he continued to report record results in regulatory filings during that time.

Instead of figuring out how those “suspicious results” were achieved, Adelson waved away queries, dismissed people who asked too many questions, and refused to read documents that detailed the ongoing fraud, the judges asserted. Based on that evidence, a reasonable jury could conclude that Adelson’s “failure to question the suspicious circumstances established…purposeful contrivance to avoid guilty knowledge.”

During his sentencing last May, Adelson was reportedly apologetic. “I only blame myself and take full responsibility,” he said. He was released on $1 million bond pending his appeal.