Forbes / Aug. 21, 2000 / http://www.forbes.com/forbes/2000/0821/6605062a.html
Welcome Back, Ilan
Try as he may, convicted inside trader Ilan Reich can't avoid controversy.
By RiShawn Biddle
ILAN REICH WROTE A FOOTNOTE TO history as one of the first confederates of the notorious
Dennis Levine to be implicated in the 1980s insider trading scandals. Formerly a lawyer at
Wachtell, Lipton, Rosen & Katz, Reich served a year in prison in 1987 for his part in the securities
Quietly rebuilding his name ever since, he resurfaced again in 1998 at Inamed Corp., a Santa
Barbara, Calif. maker of saline breast implants. Eventually rising to the post of co-chief executive
officer, he helped lead Inamed out of a morass of crippling tort litigation, fend off a hostile investor
and stop the red ink. Shares of the $189 million (1999 sales) company have soared to $33.56
from $3 when Reich joined.
But not everyone agrees that Reich is a changed man. Among his critics are Gabe Kaplan, the
frizzy-haired cornball comedian from the 1970s sitcom Welcome Back, Kotter, and Jon Peters,
the onetime cohead of Sony Pictures.
The two are among a group of investors in something called Medical Device Alliance (MDA),
another company started by Donald McGhan, the founder of Inamed. McGhan, a serial
entrepreneur who has started--and bungled--several medical-device companies, was running
both Inamed and MDA at the same time in 1997 when he funneled $8.4 million of investors'
money out of MDA to prop up the floundering Inamed.
Today MDA is in receivership and investors are suing Inamed, McGhan, Wedbush Morgan
Securities and others to salvage their investment. Reich, though not named as a defendant, is
accused of helping McGhan cover up the loans from MDA to Inamed. Then, when it was time to
repay MDA, Reich paid off McGhan with 860,000 restricted shares of Inamed, shares that the
MDA investors say belong to them.
"Our money was supposed to develop this miracle product. Now we find out it was being used to
pull McGhan and Reich's breast implant investment out of trouble," fumes Kaplan, displaying little
of the sense of humor he had as straight man to John Travolta and the Sweathogs.
Adds Robert DiMinico, the investment manager who put Kaplan and others into MDA: "McGhan
used the money for his own gain and Reich's deal is the proof of it." DiMinico in turn blames
former partner Joseph Salvani, a curious stock promoter with a colorful past (FORBES, May 4,
1998), for suckering him into this and other deals that are the subject of yet more litigation.
Fingers are pointing all around. Reich, whom McGhan helped recruit to the company from a New
York law firm, now accuses McGhan of misrepresenting where the loans were coming from. In
yet another lawsuit, Inamed accuses McGhan of spending $6.4 million when he was running
Inamed to lease corporate jets from a firm owned by a prior chief executive.
McGhan, in turn, accuses Reich of threatening him with federal investigations and shareholder
lawsuits if he didn't agree to Reich's deal to take the Inamed shares in lieu of cash.
Reich denies that he helped McGhan cover anything up, and that if anybody is at fault, it's
McGhan. But as far as Inamed's former auditors at what used to be called Coopers & Lybrand
were concerned, Inamed's accepting the MDA money in the first place was an "illegal act" that
violated the terms under which MDA's shareholders invested. Even after resigning in March 1998,
the accountants refused to sign off on Inamed's 10-K until the matter was resolved.
McGhan was booted out of MDA last year, but Kaplan and his fellow investors will have a hard
time retrieving their money. The Inamed shares MDA recovered from McGhan in payback for the
money he moved to Inamed are worthless so long as Reich refuses to lift transfer restrictions on
them. And he won't do that until MDA releases Inamed from liability in the suit against McGhan et
"It's a baseless lawsuit," huffs Reich. "If they want to fight it, that's fine."
Kaplan is unamused. "After three years of Reich and McGhan, the only medical device I want to
deal with is my toothbrush."