But the big news was that Schachter didn’t mention Martha Stewart. Martha Stewart Living Omnimedia shares jumped over 12 percent after her lawyers issued a statement that Waksal’s plea had nothing to do with Stewart. By now the possible involvement of Stewart had overshadowed anything else connected to ImClone, including the brazen criminal behavior of its chief executive. The irony was that there never would have been a Martha Stewart investigation had Waksal not set the case in motion when he had his accountant phone Merrill Lynch to sell his shares.
W
ith the testimony of Faneuil, Pasternak, and Armstrong, as well as the phone records, the deleted e-mail, and the doctored reference to “@ $60,” the government had the makings of a sweeping case against Martha Stewart: insider trading, false statements, obstruction, conspiracy. Apart from the merits, however, the prospect of a trial of a high-profile celebrity like Stewart and her powerful broker Bacanovic was the last thing Jim Comey and his office of assistants were looking for in 2002. The office was already embroiled in investigations of massive frauds at Enron and WorldCom and a high-profile prosecution of Frank Quattrone, the Credit Suisse First Boston banker who brought dozens of companies public during the
dot.com
explosion. By comparison, Stewart’s potential insider trading and her and Bacanovic’s subsequent perjury, false statements, and obstructions paled in significance. Yet the overwhelming press interest had already shown that any Stewart prosecution would be the office’s highest-profile case. She had some of the country’s best and most expensive lawyers. She had a large and rabid popular following. No matter what the evidence, it was a case the lawyers felt they might well lose.
Comey desperately wanted the case to reach a settlement with guilty pleas from Stewart and Bacanovic. He couldn’t understand Bacanovic’s obstinacy. After all, he hadn’t traded and didn’t even face potential insider trading charges. In return for the truth, and testimony against Stewart, he probably could have reached a reasonable outcome with very low risk of any jail time. The incentives to do so seemed so compelling that Comey bet that Bacanovic would come forward, testify truthfully, and the case would be over. Faneuil obviously hoped for the same thing, sparing him the ordeal of testifying and allowing him to be sentenced and move on with his life.
All of their hopes proved in vain. Bacanovic, through his lawyer, never indicated any willingness to even discuss a potential plea. The loyalty to Stewart he’d expressed to Faneuil proved insurmountable, as well as the likelihood that his career would be ruined if he turned against her. And perhaps there was an element of guilt. After all, he may have felt he was doing Stewart a valuable favor, but by having Faneuil tell her about the Waksal selling, it was Bacanovic who had put Stewart in jeopardy. And in contrast to Faneuil, there was never any indication that Bacanovic felt any moral or civic duty to tell the truth.
Stewart’s lawyers mounted a strenuous effort to persuade Comey, Seymour, Schachter, and the others not to bring charges. They spent many hours in presentations at the U.S. Attorney’s office and submitted voluminous factual and legal analyses to support their arguments. Much of their efforts focused on the insider trading charges. The law of insider trading is complicated, and everyone agreed this was an unusual case. Criminal insider trading requires three major elements: the sale or purchase of a security, in breach of a fiduciary duty or relationship of trust, while in possession of material, nonpublic information about the security. Waksal’s trading and attempted trading obviously met all three criteria: he was an ImClone officer with a duty to shareholders and he knew about the adverse Erbitux decision.
Stewart clearly sold shares. But she owed no duty to ImClone shareholders. She had been tipped by Faneuil acting on Bacanovic’s instructions. Did she know, or should she have known, that Bacanovic was breaching a duty of confidentiality imposed upon him by Merrill Lynch–in legal terminology, that Bacanovic had “misappropriated” the information? Nor did Stewart know about the Erbitux decision. She was essentially copying, or “piggybacking,” Waksal’s trades. The fact that he was trying to sell all his shares was clearly nonpublic. But was it material? Would other ImClone investors have been likely to act on that information?
The Wachtell lawyers debated these issues at length. The prosecutors were convinced the information was material–sale of stock by corporate insiders is deemed so important that it must be reported to the SEC and publicly disclosed. Moreover, Stewart learned that Waksal was trying to sell
all
his shares and was doing so precipitously. Most if not all investors would have reacted as Stewart did to the news of Waksal’s sales. And obviously Stewart knew that Bacanovic had done something wrong, and by acting on his information, so had she. Why else would she have tried to delete the e-mail message that “ImClone is going to trade down”? And why else would she and Bacanovic have lied to cover the real reason for her trade?
But Stewart’s lawyers made more headway by arguing that no one had ever been charged with a crime for “piggybacking” on a trade by someone else, although the SEC had pursued numerous such civil cases. Perhaps there should have been some criminal charges in piggybacking cases, but there hadn’t been. It wouldn’t be fair to charge Stewart with a crime when no one else had been, and it would likely fuel suspicions already surfacing in the press that she was being persecuted because she was a successful woman in business.
Schachter and several others in the office didn’t buy that argument. If the material, nonpublic information was Waksal’s hasty attempt to sell all his shares, then Stewart wasn’t piggybacking on someone else trading on that information. Stewart herself knew that Waksal was selling–and that’s what motivated her decision. The inside information was Waksal’s selling, not the Erbitux decision.
The discussions became heated at times, with Schachter and securities fraud chief Richard Owens adamant that Stewart should face insider trading charges, and Seymour leaning the other way. The SEC’s head of enforcement was also urging them to indict Stewart in order to send a message to other potential inside traders. That decision, too, finally went to Jim Comey.
“I almost didn’t indict this case,” Comey later recalled. “It might have obscured everything else we were doing: WorldCom, Adelphia, ImClone. If we charged Martha Stewart, it would be a media circus. Would people say I did it just because I wanted to become famous? Did I need this? And it was a close case. We might have lost given the legal talent she mustered and her celebrity.”
As Comey reflected on the facts, especially the obvious lies that Stewart and Bacanovic had promulgated, he remembered one of his earliest cases, when he was a young prosecutor in Richmond, Virginia. He was investigating a Baptist minister named James Miller. At the time, the mayor of Richmond encouraged people who wanted to curry favor with him to patronize various friends and family members who in turn paid kickbacks to the mayor. A company that wanted to privatize the city cemeteries was told to pay Miller, who cashed the check and then paid the mayor. “Please don’t lie,” Comey all but begged him. “You’re a young man. The mayor will plead guilty, and he’ll turn against you. Please don’t do this to yourself.” Miller continued to insist he hadn’t paid the mayor anything.
As Comey had predicted, the mayor did plead guilty and turn against his minister. “We indicted James Miller for perjury. He went to jail,” Comey said. “I was thinking about Martha, and then I got angry with myself. I was hesitating because she was rich and famous. People said the opposite about me–that I prosecuted her because she was rich and famous, but it’s not true. And I asked myself, if I could prosecute James Miller, how could I
not
indict Martha Stewart?”
B
efore making any final decision, Comey asked Dave Kelley to do some research on recent perjury and false statement cases. It was widely perceived–and Stewart’s lawyers had argued–that perjury and false statements are crimes that are rarely prosecuted. But Kelley came back with statistics that showed two thousand such cases had been filed in just the past year. Perjury was not only being prosecuted, it was threatening to become an epidemic.
Comey also wanted to know how many insider trading convictions had been obtained against someone who, like Stewart, was a “tippee” with no fiduciary relationship to the company. Schachter and Owens couldn’t produce any. They found numerous SEC cases, but no criminal ones. “There’s no way I will use Martha to push the boundaries of the law,” Comey insisted. “This case cannot be a laboratory for developing an insider trading theory.”
During their next meeting, Comey asked Morvillo to concentrate on the evidence of Stewart’s false statements and not to address the insider trading issues. Morvillo rose to the occasion with a simple argument: “She’s incredibly wealthy!” he said. “Why would she lie to save a few thousand dollars?”
“If she was picking up her
New York Times
and saw a $5 bill lying nearby, would she pick it up?” Comey asked. His point was that many rich people had gotten rich by caring about every penny. He already knew enough about Stewart to know she fit the pattern.
Morvillo didn’t answer.
Schachter and the other prosecutors were also arguing for a count of securities fraud. Stewart had misled investors in her company by peddling a false story of innocence. She hadn’t simply denied guilt and declined further comment. She had manufactured a false story and used it to prop up her stock price. Indeed, the stock had often rallied on days when Stewart had proclaimed her innocence and reiterated the $60 alibi.
“They argued I was indicting her for protesting her innocence,” Comey said. “But she went further. She made misstatements to shareholders. The more I thought about this case, the gravamen was her lies. The security count fit in with this.”
That spring, Stewart’s lawyers and the prosecutors launched into intense plea negotiations, with Karen Seymour the lead negotiator for the government. Given the intense media scrutiny, Comey was anxious to resolve the case with a plea, preferably before indictment. Stewart’s lawyers were insistent: they’d consider a plea, but only if there was a guarantee that there would be no jail time. Comey refused. He’d never made such a deal, and Martha Stewart was not going to be the first. He continued to walk the sometimes fine line between giving Stewart uniquely favorable and unduly harsh treatment because of her celebrity and the visibility of the case.
Talks dragged on for months, with growing complaints from Schachter and others who felt Stewart and Bacanovic’s lawyers had had more than an adequate chance to make their arguments. Seymour didn’t want anyone to feel they’d been pressured by arbitrary deadlines. By Memorial Day, they’d pretty much reached their final negotiating stances: Stewart would plead guilty to one count of making a false statement, the least serious of the potential felony charges against her and, according to the sentencing guidelines, the one with the least chance of a jail sentence. Comey, in return, agreed that the Justice Department wouldn’t seek a jail term. It wouldn’t guarantee she wouldn’t get one. But if the judge decided to impose a jail term, Stewart would have the right to withdraw her guilty plea. Under these circumstances, Comey felt the possibility of jail to be extremely remote. “That’s a deal breaker,” Seymour warned, urging that he go ahead and give the guarantee. But Comey wouldn’t go any further.
That weekend Comey and David Kelley were playing golf as Seymour delivered the ultimatum to Morvillo and Stewart’s lawyers. They were on the tee when Comey’s cell phone rang. Seymour was ebullient: Stewart had accepted. At least, Pedowitz had indicated she would. “We’ll get there,” he’d said. The clear understanding was they had a deal. Stewart would plead to one felony as long as she could withdraw the plea if the judge sentenced her to prison. The SEC would allow her to remain a director of her company. Beyond the mechanics of the plea, the deal was a breakthrough: Stewart was finally accepting responsibility and admitting guilt. To the prosecutors, that was far more important than any jail term.
The prosecutors were relieved. The negotiations had been tough. Given Stewart’s celebrity, everything about them had brought intense scrutiny. A settlement would save the enormous costs of a trial as well as the risk of losing. They felt the facts were compelling, but who knew how a jury would react to Stewart? None of them had tried a case against a defendant so visible, whom everyone thought they knew, and who was beloved by many.
Little more than forty-five minutes later, Pedowitz called Seymour again. “Martha won’t do it,” he told her. Seymour’s heart sank. Stewart had decided, according to Pedowitz, that “her business and reputation couldn’t take any admission of guilt.” The lawyers had pressed her, pointing out the risks of trial and trying to disabuse her of any notion that she’d get an even better deal by holding out. But Stewart had stubbornly resisted. Seymour thought it significant that Pedowitz didn’t make any further claims that Stewart was innocent, only that she had made the decision for business reasons.
Seymour’s primary reaction was one of sadness, not just for Stewart, but for Bacanovic, who’d obviously tethered himself to her fate; for Faneuil, who would now have the ordeal of a trial; for the other witnesses; for Stewart’s employees and shareholders, for whom the ordeal would be vastly prolonged. Seymour felt like she was watching a train wreck unfold that she was powerless to stop. She felt no good would come of Stewart’s decision. But at this juncture the Justice Department had no alternative but to try the case.