Tangled Webs (7 page)

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Authors: James B. Stewart

Tags: #History, #United States, #General, #Law, #Ethics & Professional Responsibility

BOOK: Tangled Webs
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“Do lawyers really talk that way?” Faneuil asked.
Gutman shrugged and chuckled. “I can’t tell you exactly what Marcus said to me, but what he said in so many words was that Merrill Lynch has reached a deal with the government in which Merrill Lynch will hand over the Waksals on a silver platter. In return, the government will look the other way with regard to the Martha Stewart situation.”
Faneuil struggled to absorb the implications. The notion of some kind of deal between Merrill Lynch and the government struck him as far-fetched, but what did he know? Marcus and Gutman were the lawyers. “Does this change your advice?” Faneuil asked.
“Yes, it does. I think you should lie low. If Merrill Lynch asks you any more questions about what happened, you can continue to answer. Just don’t offer them anything. Try to be as brief as possible. Stick to yes-or-no answers if you can.”
“What if they ask me pointed questions? What if they ask specifically what I said to Martha?”
Gutman leaned back in his chair and put his hands behind his head. “Then don’t lie.” He was smiling. “But if the government ever tries to speak to you again, call me first.”
Faneuil left the meeting feeling a mixture of relief and confusion. The painful confrontation with the government was now postponed, perhaps forever. On the other hand, he wasn’t supposed to lie but he wasn’t supposed to change his story either. He wasn’t sure how he was going to manage such a balancing act. But for now, he was supposed to “lie low.” That’s what he intended to do.
 
 
A
few days later, on January 10, Armstrong handed Martha Stewart a message that had come in that morning:
“Peter Bacanovic would like to speak to MS about the money in the accounts and the status of it, and would like to have dinner alone with her next week, maybe Tuesday (National Retail Federation) or Wednesday (Lillian Goldman) or Thursday (nothing on calendar).” Armstrong had added prior commitments for Stewart’s reference. Like the earlier message from Bacanovic, Armstrong thought this one was odd. There was nothing pressing about Stewart’s portfolio with Bacanovic that she knew of. It was also unusual for Bacanovic to ask for a dinner alone with Stewart.
After Stewart read the message, she was dismissive. Bacanovic, she told Armstrong, didn’t merit a dinner, or even a lunch. If she had to meet with Bacanovic alone and in person, they could meet for breakfast. Armstrong mentally dropped Bacanovic a notch in Stewart’s social and business hierarchy.
Stewart’s driver dropped her off at Le Gamin, a small French restaurant on Ninth Avenue and Twenty-first Street, at 9:15 a.m. on January 19. Bacanovic was waiting.
 
 
A
t the U.S. Attorney’s office in lower Manhattan, Steve Peikin, deputy head of the securities fraud unit, was startled as he read a January 19 front-page article in the
New York Times
, “House Panel to Investigate a Cancer Drug and Its Maker.”
Saying it had “serious concerns” about how ImClone Systems had communicated with investors, a House committee said yesterday that it would investigate whether the company had covered up problems involving its cancer drug.
The House’s investigation hinted at the possibility of securities fraud, and the U.S. Attorney for the Southern District of Manhattan, which covers Wall Street, traditionally prosecutes securities crimes while the SEC handles civil cases.
 
But what really struck Peikin was another aspect of the story:
Panel members were also concerned about stock sales by ImClone executives. Samuel D. and Harlan W. Waksal, the chief executive and chief operating officer of ImClone, together sold more than $150 million of ImClone stock at peak prices in the months before the FDA action.
 
The story continued:
ImClone’s stock, which was trading above $70 in early December before rumors of the FDA problems began surfacing, has lost more than twothirds of its value since then and some shareholder lawsuits have been filed against the company. Yesterday the stock fell $8.93, or about 30 percent, to $21.15.
ImClone, Bristol-Myers and the FDA all said they would cooperate with the House committee. ImClone also said in a statement that it “remains fully confident” in Erbitux.
 
One hundred fifty million dollars in insider sales before the release of bad news? The situation reeked of possible insider trading by the two top officers in the company. Though the SEC investigation was already under way, it hadn’t progressed to the point where possible criminal charges were being considered, and so the U.S. Attorney’s office hadn’t been notified. But Peikin saw no reason to delay. He hurried through the office looking for an available assistant. Everyone was busy on other cases, but finally he found Michael Schachter, who said he’d get on the case.
Schachter, age thirty-three, had recently joined the office after working at a Chicago law firm. He’d attended Indiana University and DePaul law school, and spoke with a trace of his native midwestern accent. He’d been so eager to be a federal prosecutor that he applied to fifteen U.S. Attorney’s offices around the country. New York had been the first to respond.
Schachter called the SEC and got the trading records. Obviously all the Waksals would be called in for questioning. Schachter wondered who else Waksal might have tipped. It was no secret that he and Martha Stewart were close, and the timing of her trade looked highly suspicious. A week later, on January 25, Schachter called Martha Stewart Living’s general counsel, Greg Blatt, to say that the Justice Department was investigating trading in ImClone and would like to interview Stewart–that very day, if possible.
It was the first anyone at Stewart’s company, apart from Armstrong and Stewart herself, knew anything about the suspicious ImClone trading. The implications, to which Stewart herself had seemed oblivious, were profound. Stewart was the chief executive of a publicly traded company, held to strict standards of conduct and disclosure. She was also chief executive of a company in which she herself–as an executive, a talent, a personality, and a brand–was the company’s most valuable asset. Without Stewart, there was no Martha Stewart Living.
Stewart was in Los Angeles that day filming her television show. Blatt immediately called Andrew Nussbaum, a lawyer at Wachtell Lipton Rosen & Katz, the prominent firm that had long represented Stewart’s company and had successfully steered it through its initial public offering in 1999. Wachtell is one of the most prestigious firms and has long specialized in mergers, acquisitions, and corporate law. Its lawyers are perennially ranked as the nation’s most highly paid in the
American Lawyer
’s annual survey of partnership incomes. It also has a small but highly regarded white-collar crime practice, headed by Lawrence Pedowitz, former chief of the criminal division of the Manhattan U.S. Attorney’s office. Nussbaum in turn contacted John Savarese, a former Supreme Court clerk and lecturer on white-collar crime at Harvard Law School.
After learning about the call to Blatt, Stewart called John Cuti, a lawyer who was married to her daughter, Alexis, or “Lexi,” as she was known. Even though Alexis and Cuti had virtually separated and were contemplating a divorce, Stewart and Cuti had remained friends and she called him as soon as she heard about the call from the U.S. Attorney’s office. Cuti wasn’t unduly concerned; he assumed that the government was interested in the Waksals, not Stewart. But he agreed she needed a criminal lawyer, and at her request, checked on Savarese. All the reviews were glowing.
Stewart’s status as chief executive of a publicly traded company posed an unusual dilemma for her lawyers. The prudent course would have been to delay, to become thoroughly familiar with all the evidence, and only then–perhaps–allow Stewart to be questioned by prosecutors. But Stewart was no ordinary defendant. Because she was chief executive, any criminal investigation of her activities, even if unrelated to the company itself, might have to be disclosed as a “material” fact that might affect investors’ decisions about whether to buy, sell, or hold stock in her company. And anything short of a declaration that Stewart was cooperating fully with the investigation could be devastating for the stock price, affecting the company’s financial health as well as Stewart’s own personal fortune, most of which was in her company’s stock.
The phone records Armstrong maintained reflect a flurry of calls from Savarese to Stewart beginning Monday, January 28. What Savarese asked and what Stewart said has never been disclosed, since the conversations are protected by the attorney-client privilege. But people close to the Stewart defense team maintain that Stewart insisted that she hadn’t spoken to Waksal before selling and that she didn’t know about the FDA’s Erbitux ruling. This was the essence of any potential insider trading case from the lawyers’ perspective: Did Waksal tip Stewart? The answer was no. However, Stewart also told them the $60 story, which is what Bacanovic had said in his statement to government lawyers. She didn’t volunteer anything about the call from Faneuil reporting that the Waksals were dumping their shares. In other words, Stewart failed to tell them that she’d been told the Waksals were dumping their shares–the real reason she sold.
Savarese also called Merrill Lynch, where Marcus reassured him that Stewart “had nothing to worry about,” according to lawyers familiar with the call. According to these lawyers, Marcus told Savarese that Bacanovic had also offered the $60 explanation, which corroborated Stewart’s account. Remarkably, Marcus never mentioned Doug Faneuil. Nor did he say that Bacanovic and Faneuil had given contradictory versions of who actually spoke to Stewart and took the order that day, let alone that phone records established that it was Faneuil who took her call. Instead, he stressed that Merrill had no phone records or any other physical evidence suggesting any contact between Stewart and Waksal. (A Merrill Lynch spokesman said Marcus wouldn’t comment on his discussions with Stewart’s lawyers.) Marcus also didn’t reveal that Bacanovic was Waksal’s broker.
Savarese also spoke to Stewart’s employees, including Ann Armstrong. According to Savarese’s notes of the conversation, Armstrong told him that Stewart had indeed spoken to Bacanovic and that she had stayed on the line to say, “Martha, you’re on with Peter, and Peter, you’re on with Martha.” Savarese thought he now had three sources–Stewart, Bacanovic, and Armstrong–all telling the same story. (What Armstrong actually told Savarese remains in dispate since Armstrong maintains she told Savarese the same thing she did anyone else who asked, which was that she connected Stewart to Bacanovic’s office.)
Should Savarese have been more skeptical? The timing of Stewart’s trade was, on its face, highly suspicious. The absence of a stop-loss order confirming the $60 story should also have been troubling. On the other hand, the lack of any direct contact between Waksal and Stewart prior to her trade seemed to prove her contention that she hadn’t acted on any inside information. Moreover, the Wachtell lawyers had no way of knowing that Bacanovic was also Waksal’s broker. And they didn’t even know Faneuil existed. Without this crucial information, the possibility that another form of inside information–that the chief executive was dumping all of his shares–was transmitted to Stewart by her broker’s assistant at Merrill Lynch didn’t occur to Savarese or any of the other lawyers representing Stewart.
In any event, by Thursday, Savarese had concluded that Stewart should submit to questioning at the U.S. Attorney’s office as soon as possible, which turned out to be the following Monday, February 4. Not only would she cooperate, but she should do so with no strings attached. Potential targets of investigations often make a “proffer,” a description of their likely testimony, and reach an agreement that nothing disclosed can be used in any subsequent prosecution. (Such agreements, however, never provide any immunity for perjury or false statements.) Evidently so confident was Savarese in Stewart, and so eager to make a favorable impression on the government lawyers, that he made no proffer on her behalf and sought no protection for anything she might say. And it did make an impression: the prosecutors thought it was an extraordinary assertion of Stewart’s innocence.
Armstrong noted in Stewart’s phone log that day: “John Savarese would like you to call him sometime around 4:30, 5 o’clock. Won’t be long. He’d also like to meet you at Starrett for an hour or so before heading downtown on Monday.” Armstrong knew by this point that Stewart was going to be questioned by law enforcement officials, but Stewart hadn’t told her anything beyond that.
Shortly after that message, Armstrong noted that Bacanovic had called.
Then, at five, Stewart spoke on the phone to Savarese for about half an hour. As soon as she finished, she told Armstrong that Savarese wanted to see all of her messages from Wednesday, December 26, through Monday, January 7, and that she should fax copies to him. Armstrong started scrolling through the message log in her computer and had gotten to December 26 when Stewart walked over to Armstrong’s desk and said she wanted to see the messages herself.
Stewart took Armstrong’s seat, while Armstrong leaned over her and continued scrolling. When she got to Bacanovic’s message of the twenty-seventh about ImClone trading downward, Stewart leaned over her and grabbed the computer mouse from her hand. She used it to highlight the entire message after Bacanovic’s name. Stewart typed over it: “re imclone,” which had the effect of deleting the prior message. She got up from the computer, and Armstrong dutifully corrected the capitalization and punctuation: “Re: ImClone.” Then Stewart had second thoughts. “Put it back,” she said. Armstrong had no idea how to do that. Stewart walked to her office door, turned, and told Armstrong, “Get my son-in-law on the phone.”

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