Tangled Webs (3 page)
Authors: James B. Stewart
Tags: #History, #United States, #General, #Law, #Ethics & Professional Responsibility
Faneuil said he was on vacation.
“Then we’ve got a lot to do today,” Goldberg said. “Ignore your other business. I want you to act like I’m Peter’s only client.”
Faneuil wasn’t sure what to say.
“Here’s what I want you to do: Sell all of Sam’s [ImClone] shares right away.”
Faneuil hadn’t been sure about Aliza, but he was all but certain he couldn’t just sell Waksal’s shares. On the computer screen they were designated with “R” for restricted, in red. Restricted shares can only be sold pursuant to SEC Rule 144, which sets certain conditions and usually requires that a lawyer certify the conditions have been met.
“Alan, I can’t just put in the trade,” Faneuil said, mentioning Rule 144.
“Okay,” Goldberg said. Faneuil was surprised he seemed to accept this without argument. “The fax instructs you to transfer all of Sam’s shares to Aliza’s account. You’ve got to do this immediately. Then sell them once they’re in her account.”
Faneuil doubted this brazen attempt to evade the restriction would work, but he stayed calm. He prided himself on his cool demeanor in crises. “Alan, you can’t just do that. The shares are still restricted, even if they’re in Aliza’s account.”
“Do me a favor and ask Peter,” Goldberg said, sounding annoyed. He hung up.
Faneuil hated calling Bacanovic so soon; it was barely nine-thirty, and Bacanovic hadn’t even been in Florida twenty-four hours. But this was one of Bacanovic’s biggest accounts, the transaction was large (Sam Waksal had nearly 80,000 ImClone shares worth nearly $5 million in his account at Merrill, although they were margined, since Waksal had borrowed heavily against them), and it raised all kinds of issues. Faneuil reached Bacanovic on his cell phone, and briefed him on the Waksal activity.
Bacanovic seemed to take the unusual developments in stride, told him to execute the trade for Aliza–the shares weren’t restricted–but to check with a manager about Sam Waksal’s request. Faneuil put through the order for Aliza, realizing a total of $2.46 million. Then he found Julia Perez, the only manager in the office that day, and told her about Waksal’s request to transfer the shares to his daughter. “We can’t do that, right?” he asked.
“Absolutely not,” she concurred.
On the way back to his desk, Faneuil stopped at the fax machine. There was the fax from Goldberg:
“Urgent: Immediate attention required. Dear Peter: Please transfer the entire balance in the above referenced account to the account of my daughter, Aliza Waksal . . . including all shares of ImClone and the related margin balance. It is imperative that this transfer take place tomorrow morning, December 27, first thing.” The last sentence was underlined.
Faneuil called Goldberg, told him he received the fax but that his manager had blocked the sale. Goldberg ordered him to transfer the shares to Aliza’s account anyway. Faneuil said he’d see what he could do. Aliza called again, asking if he’d gotten the fax and was making the transfer.
He’d barely hung up when another Waksal called, Elana Waksal Posner, Waksal’s sister.
“What’s ImClone at? What’s the stock at?” she demanded. She sounded like she was on a cell phone in her car.
Faneuil said it was just above $60.
“Shit,” she said. “It’s already going down.” She hung up, but called back soon after. Her husband was in the background, and they argued about whether to sell her ImClone shares. Faneuil listened patiently. Finally she said, “I’m selling.” But when Faneuil checked, he discovered she didn’t have any ImClone shares in her Merrill account with Bacanovic. “Oh, they must be in my other accounts,” she said, and hung up. (They were in her online Merrill account.)
Faneuil kept looking for a way to transfer or sell Sam Waksal’s shares, but the legal department blocked him, reporting that there was “news pending” on the company preventing any sales by officers. It was the first Faneuil had heard about any news. He relayed this development to Goldberg, who seemed annoyed. Shortly after, Sam Waksal himself called, demanding to know why he couldn’t sell his shares. When Faneuil mentioned there was news pending, he shouted, “That’s ridiculous! There’s no pending news!” Then he slammed down the phone.
Faneuil reached Bacanovic again.
Faneuil said Goldberg was really pressing him, wouldn’t take no for an answer. “Take it with a grain of salt,” Bacanovic told him. “He’s always very demanding, but don’t worry about it.”
Faneuil also described the calls from Aliza and Elana. “Why is [Goldberg] so frantic? Why are they acting so crazy? What do you think is going on?” Faneuil asked.
There was a pause. Suddenly Bacanovic interjected, “Oh my God! We’ve got to get Martha! Get her on the phone.”
F
rom humble beginnings in New Jersey, Martha Stewart had vaulted from stockbroker, to caterer, to cookbook author, to Kmart spokeswoman, to magazine creator and editor, to a one-woman lifestyle conglomerate. She was indisputably talented, with a keen aesthetic sensibility, unerring taste, and an encyclopedic command of household skills. She was also ambitious, a perfectionist, a workaholic, stubborn, and, at times, a harridan.
rom humble beginnings in New Jersey, Martha Stewart had vaulted from stockbroker, to caterer, to cookbook author, to Kmart spokeswoman, to magazine creator and editor, to a one-woman lifestyle conglomerate. She was indisputably talented, with a keen aesthetic sensibility, unerring taste, and an encyclopedic command of household skills. She was also ambitious, a perfectionist, a workaholic, stubborn, and, at times, a harridan.
Through sheer drive, determination, hard work, and an unerring instinct for self-promotion, Stewart had transformed herself into a ubiquitous one-woman brand–“Martha”–and her name into a widely used adjective, as in “That holiday centerpiece is so Martha.”
Stewart and Bacanovic had struck up a friendship while Stewart’s only child, her daughter, Alexis, was dating Sam Waksal. Bacanovic had worked at ImClone for two years, had stayed in contact with Waksal, and Waksal had introduced him first to the younger Stewart, then to her mother. The photogenic Bacanovic showed up in several spreads in
Martha Stewart Living
, including a brunch feature in which he, Stewart, and other guests were pictured wearing bathrobes. A framed photo from the shoot was the only personal photo Bacanovic had in his office.
Martha Stewart Living
, including a brunch feature in which he, Stewart, and other guests were pictured wearing bathrobes. A framed photo from the shoot was the only personal photo Bacanovic had in his office.
When Waksal learned that his former employee had become a stockbroker, he opened an account with him at Merrill Lynch, as well as one for his daughter, Aliza. Stewart had steered her company’s pension account to him and had recently consolidated more of her accounts with him. With clients like the Waksals and Stewart, Bacanovic was a rising star at Merrill Lynch, his future secure.
Bacanovic and Waksal seemed to have much in common besides their mutual friendship with Stewart, at least on the surface. Like Bacanovic, Waksal could be charming and charismatic. Both were children of immigrants: Greek in Bacanovic’s case, Polish in Waksal’s. Waksal’s father fought in the Polish resistance during World War II, and his mother was a concentration camp survivor. Waksal grew up in modest circumstances in Ohio, where he attended public schools and Ohio State. He earned a PhD in immunology, did research in Israel, and landed a postdoctoral position at Stanford. He had become enormously wealthy, and often hosted glamorous, celebrity-studded parties in his sprawling loft in Manhattan’s trendy SoHo neighborhood. His rise had seemed meteoric.
Despite his financial success, Waksal’s career had been shadowed, though never derailed, by allegations of a series of disturbing and at times bizarre ethical lapses. The
Wall Street Journal
reported that Waksal was asked to leave Stanford after the doctor in charge of the lab concluded Waksal had lied about the source of antibodies he’d obtained from the Sloan-Kettering Institute in New York. Waksal subsequently apologized and told another doctor that he “was seeking psychiatric help and had changed,” according to the
Journal
.
Wall Street Journal
reported that Waksal was asked to leave Stanford after the doctor in charge of the lab concluded Waksal had lied about the source of antibodies he’d obtained from the Sloan-Kettering Institute in New York. Waksal subsequently apologized and told another doctor that he “was seeking psychiatric help and had changed,” according to the
Journal
.
Waksal moved to the prestigious National Cancer Institute. But his colleagues there reported a disturbing pattern: “When the critical time came to deliver his part of the collaboration, there would be a catastrophe of some sort–a tissue culture would become contaminated or the mice would develop an infection and have to be killed,” the supervising doctor told the
Journal
. His research fellowship was not renewed.
Journal
. His research fellowship was not renewed.
Nonetheless, Waksal moved to Tufts University, outside Boston, where his brother Harlan was a medical resident. There allegations were even more serious : that Waksal fabricated laboratory results. In one bizarre episode he was accused of impersonating his brother, while Harlan himself was arrested in the Fort Lauderdale airport carrying more than two pounds of cocaine. In 1982 Harlan was convicted of possession of a controlled substance with intent to distribute and sentenced to nine years in prison. On appeal, the search was deemed illegal because Harlan hadn’t consented to it, and his conviction was overturned. Still, no one disputed that Harlan was carrying a large quantity of cocaine through an airport.
Sam Waksal’s ouster by Tufts didn’t prevent him from securing yet another prestigious medical position, this time at New York’s Mount Sinai Hospital (Tufts officials later said no one from Mount Sinai conducted any reference checks). Waksal was soon fired amid recurring allegations of fabricated lab results, financial irregularities, and ownership disputes over technology. (Waksal’s files at Mount Sinai were sealed as part of a termination settlement the hospital reached with Waksal.)
In part due to Sam Waksal’s prestigious résumé, and in part due to an investment frenzy for anything in the biotech field, the Waksal brothers successfully raised $4 million to launch ImClone Systems in 1994 despite their checkered careers. As Waksal told
Business Week
in 2001, he and Harlan “thought we’d focus on infectious diseases, cancer, and diagnostics, make some products, get rich, and retire early.” With the money they raised they opened a research lab on the site of an abandoned shoe factory in Manhattan. The company never earned a profit, but in the biotech-crazed 1990s, that hardly mattered. It went public in 1991 at $14 a share, and Bacanovic was one of the employees of the fledgling company who received a few hundred shares in the initial public offering.
Business Week
in 2001, he and Harlan “thought we’d focus on infectious diseases, cancer, and diagnostics, make some products, get rich, and retire early.” With the money they raised they opened a research lab on the site of an abandoned shoe factory in Manhattan. The company never earned a profit, but in the biotech-crazed 1990s, that hardly mattered. It went public in 1991 at $14 a share, and Bacanovic was one of the employees of the fledgling company who received a few hundred shares in the initial public offering.
Despite many fruitless efforts to develop new drugs, ImClone was essentially a one-drug enterprise, focused most recently on the development of Erbitux, a genetically engineered treatment for colorectal cancer. The Waksals had little to do with developing the drug; they had acquired rights to it. Dr. John Mendelsohn at the University of California developed it, and over the years Erbitux had emerged as the company’s leading (indeed, only) potential blockbuster drug. Early trials were so promising that the Food and Drug Administration put Erbitux on a fast-track approval schedule. ImClone’s stock price soared, and in September 2001 pharmaceutical giant Bristol-Myers Squibb agreed to pay $2 billion for a 40 percent stake in the company, valuing ImClone at an astonishing $5 billion. This assumed, of course, that Erbitux would be approved by the FDA. The company filed for FDA approval, and on December 20, the FDA said it had reached a decision, which would be announced eight days later, on December 28, 2001.
On Christmas Day a Bristol-Myers executive called Harlan Waksal, who was spending the holiday skiing in Colorado, to report that he’d spoken with an FDA official, and the Erbitux application looked “doomed.” Harlan conveyed the news to Sam the next morning, and the brothers embarked on a frantic round of calls to get the FDA to reconsider. But the decision was final, and the next day, when Sam Waksal returned to his office in Manhattan, the company was already drafting a press release to convey the bad news, which would be released after the stock market closed on December 28.
With his lavish standard of living, Sam Waksal gave the appearance of great wealth. He was indeed rich by most standards but lived far beyond his means and was heavily indebted. He had $75 million in personal debt, $50 million of it secured by his ImClone stock. Waksal had taken out a $44 million loan from Bank of America secured by a warrant to purchase ImClone shares. (A warrant is the right to buy shares, in this case, 350,000 shares at $5.50 a share. The warrant was potentially valuable: with ImClone trading at $60 a share, it would be worth over $19 million.) But unknown to Bank of America, Waksal had already executed the warrant by mid-2000. Once exercised, the warrant expired and had no further value. Using it as collateral for a loan was a fraud. When Bank of America asked for verification that the warrant remained in effect, Waksal provided a document with a forged signature of ImClone’s general counsel. Like so much about his life and career, when it came to his personal finances Waksal demonstrated an astonishing recklessness and disregard for any legal or ethical constraints.
Should ImClone’s price fall–as it surely would on the news that the FDA was denying the Erbitux application–Waksal faced margin calls, forced selling of other assets, and huge potential losses, as well as problems if Bank of America discovered that the warrant no longer existed. And the stock’s plunge would not only affect Waksal himself. His family members and friends had also invested in the stock.
As chairman and chief executive, Samuel Waksal was barred by the securities laws from selling stock while possessing inside information, such as the still-secret FDA decision on Erbitux, or from leaking the information to anyone else.
T
he moment Bacanovic ordered Faneuil to “call Martha,” Faneuil had figured out what was going on. Something bad was about to happen to ImClone.
he moment Bacanovic ordered Faneuil to “call Martha,” Faneuil had figured out what was going on. Something bad was about to happen to ImClone.
Faneuil placed the call to Stewart’s office, with Bacanovic on the line in Florida. The phone rang, and then Stewart’s assistant of four years, Ann Armstrong, answered. Stewart was away, traveling. They all hung up, then Bacanovic called Faneuil back. Bacanovic was going to be unreachable for a few hours; Faneuil thought he said something about going out on a boat, though he wasn’t sure. Then Bacanovic said, “Listen, Martha’s going to call and you’ve got to tell her what’s going on.”
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