Authors: James B. Stewart
Tags: #History, #United States, #General, #Law, #Ethics & Professional Responsibility
Tangled Webs (5 page)
Faneuil placed the sell order at the market price. Stewart’s 3,928 shares were sold in two blocks, one at 1:51 p.m., and the other a minute later. But without her e-mail address, he couldn’t report the transaction. He’d have to wait for Peter.
S
till at the airport in San Antonio, Stewart immediately placed a call to Waksal at ImClone headquarters. Emily Perret, his secretary, answered.
till at the airport in San Antonio, Stewart immediately placed a call to Waksal at ImClone headquarters. Emily Perret, his secretary, answered.
“Get Sam. This is Martha.” Even by Stewart’s standards, she sounded abrupt and impatient.
Perret said Waksal wasn’t there.
“There’s something going on with ImClone. Do you know what it is?” Stewart asked.
“No,” Perret said.
“I need you to go find him.”
Perret said she couldn’t do that, but would give him her message as soon as he returned. Stewart didn’t sound satisfied, but told her to have him call her at the Las Ventanas resort in Cabo San Lucas, Mexico.
B
acanovic finally called the office at about 3:30 p.m. “Did she call?” he asked Faneuil.
acanovic finally called the office at about 3:30 p.m. “Did she call?” he asked Faneuil.
Faneuil told him everything that had happened, including that he’d angered Stewart with his suggestion that he confirm the trade through Armstrong. Bacanovic seemed to take the news in stride and gave him Stewart’s personal e-mail address. Faneuil wrote her that the shares had been sold at an average price of $58.4325. “As always feel free to call me with any questions at Peter’s number. Sincerely, Douglas Faneuil.”
That evening, Faneuil met his boyfriend, Rob Haskell, at Haskell’s apartment in Chelsea. Faneuil lived nearby, and although they had separate apartments, they spent most nights together. “You wouldn’t believe what happened today,” Faneuil told him, recounting the day’s saga. Haskell seemed impressed that Faneuil had been at the center of so much activity, talking directly to a celebrity like Martha Stewart.
Later that evening, Faneuil called his father and recounted the same story. But his father reacted differently from Haskell. “Should you be telling people about this?” he wondered, sounding somewhat worried. Faneuil didn’t see why not. What was the harm?
T
he luxury resort Las Ventanas is perched on the southern tip of the Baja California peninsula with spectacular views of the Pacific. Stewart and Pasternak had checked into a suite with its own butler service. Stewart had forgotten to make a reservation for Sharkey, so she had ordered a roll-out bed for the living room. The three had been relaxing around the pool, going to the beach, frequenting the spa, and enjoying the resort’s vaunted cuisine. Stewart had bumped into financier Steve Schwarzman, the cofounder and chief executive of Blackstone Group, a big private equity and investment advisory firm. Schwarzman wasn’t a close friend, but the two knew each other socially in New York, and they had a brief conversation. On Sunday, Stewart and her companions took an organized hike through the rocky, desert terrain on the peninsula. Afterward, Stewart and Pasternak spent the evening relaxing on chaises on the terrace, drinks in hand. “Well, here we are again,” Stewart said. “Just the two of us on a holiday with no male companionship.” (Sharkey evidently didn’t count.)
he luxury resort Las Ventanas is perched on the southern tip of the Baja California peninsula with spectacular views of the Pacific. Stewart and Pasternak had checked into a suite with its own butler service. Stewart had forgotten to make a reservation for Sharkey, so she had ordered a roll-out bed for the living room. The three had been relaxing around the pool, going to the beach, frequenting the spa, and enjoying the resort’s vaunted cuisine. Stewart had bumped into financier Steve Schwarzman, the cofounder and chief executive of Blackstone Group, a big private equity and investment advisory firm. Schwarzman wasn’t a close friend, but the two knew each other socially in New York, and they had a brief conversation. On Sunday, Stewart and her companions took an organized hike through the rocky, desert terrain on the peninsula. Afterward, Stewart and Pasternak spent the evening relaxing on chaises on the terrace, drinks in hand. “Well, here we are again,” Stewart said. “Just the two of us on a holiday with no male companionship.” (Sharkey evidently didn’t count.)
Pasternak commiserated, and the two began discussing what various friends were doing for New Year’s Eve.
“What’s Sam doing?” Pasternak asked, referring to Waksal.
“He disappeared again,” Stewart replied. She added that he’d been “walking funny” at a Christmas party, and that he was selling his ImClone stock. So was his daughter, Aliza. But Merrill Lynch wouldn’t sell it, Stewart reported. Then “his stock went down.” Fortunately, Stewart had sold her ImClone shares before the Erbitux announcement. “Isn’t it nice to have brokers who tell you these things?” she commented–or so Pasternak later recalled. She really wasn’t all that interested in ImClone.
A
s soon as he got home from work on December 28, Brian Schimpfhauser turned on his television to CNBC to check on that day’s market news, as he did on most days. Schimpfhauser worked at Merrill Lynch, but downtown at 222 Broadway, far from the glamour of Rockefeller Center. He worked in compliance, as a surveillance officer, looking for evidence of improper or illegal trading. As he tuned in that Friday afternoon, he heard the news that the FDA had rejected ImClone’s application for Erbitux. Schimpfhauser had never heard of ImClone, but he knew the likely impact of a decision like that on a biotechnology stock. He made a mental note: “That stock is going down when it opens on Monday.”
s soon as he got home from work on December 28, Brian Schimpfhauser turned on his television to CNBC to check on that day’s market news, as he did on most days. Schimpfhauser worked at Merrill Lynch, but downtown at 222 Broadway, far from the glamour of Rockefeller Center. He worked in compliance, as a surveillance officer, looking for evidence of improper or illegal trading. As he tuned in that Friday afternoon, he heard the news that the FDA had rejected ImClone’s application for Erbitux. Schimpfhauser had never heard of ImClone, but he knew the likely impact of a decision like that on a biotechnology stock. He made a mental note: “That stock is going down when it opens on Monday.”
As soon as he arrived at the office Monday, New Year’s Eve, Schimpfhauser made a list of ImClone’s top officers, including Sam and Harlan Waksal. He read a summary of its business, and examined recent trading patterns. They already looked suspicious: that Thursday and Friday, just before the Erbitux news, ImClone stock had been trending down on heavier than usual trading volume. When the market opened that morning, Schimpfhauser’s prediction was confirmed: ImClone shares opened sharply lower at $45.39, down nearly $10 from Friday’s closing price. Schimpfhauser ordered a computer run on ImClone trading by Merrill Lynch clients during the two weeks preceding the announcement.
When Schimpfhauser glanced over the results, he immediately noticed the name Waksal: both Aliza and Elana. Besides the trading, he saw the transfer of Sam’s shares to Aliza’s account. This was startling. In his six years at the firm, he’d never seen activity like this in the family of a chief executive the day before an important, market-moving announcement. This was obviously a potential legal problem. As Schimpfhauser later recalled, “Some bells and whistles went off in my head.” The results also showed that Aliza Waksal had traded through the Rockefeller office; Elana, however, had executed her trade without a broker, using a Merrill Lynch online account. Then he noticed the name directly above Aliza’s on the computer printout: Martha Stewart. She, too, had traded through the Rockefeller Center office. This was getting too big for Schimpfhauser alone. He took the information to Stephen Snyder, his immediate supervisor, who in turn notified David Marcus, Merrill Lynch’s associate general counsel.
Later that morning, Judy Monaghan called Bacanovic’s office and Doug Faneuil answered the phone, explaining that Bacanovic was on vacation. Monaghan was a compliance officer and also handled personnel matters in the Rockefeller Center office. She was warm, direct, and down-to-earth, and Faneuil liked her. She told him to have Peter give her a call.
“I got a call from our surveillance unit,” she told Bacanovic. “We need to ask some questions about trades on the twenty-seventh.” It was Bacanovic’s first official query about the ImClone trading. Bacanovic said she should speak to Faneuil, since he had handled the Waksal trades. “What about Martha Stewart?” Monaghan asked. Bacanovic said somewhat vaguely that the sale was a “follow-up” to an earlier conversation about selling the shares.
Monaghan walked over toward Faneuil’s cubicle, where Faneuil was standing. “What’s up?” he asked.
“What’s going on with these ImClone trades?” She said she was fielding some questions from surveillance, and Faneuil went through the events of the twenty-seventh involving the Waksals, but didn’t say anything about Martha Stewart. He said he’d been consulting with Julia Perez, the manager he’d asked about the Waksal sale. Then Monaghan looked directly at him. “Was the Martha Stewart trade solicited?” (A solicited trade is one in which the broker suggests the transaction; an unsolicited trade is one in which the client initiates the order.)
“No,” Faneuil answered quickly, even though he wasn’t entirely sure. Bacanovic had initiated the call to Stewart, but she had called back and made the decision to sell. Since being told by Bacanovic to disclose the information to Stewart, he’d assumed everything was okay. But now some of his earlier doubts came back.
Monaghan left. Slightly panicked, Faneuil asked to borrow a cell phone from a coworker. He didn’t want to call Bacanovic on the Merrill line, which would leave a record.
“Peter,” he began, “Judy just asked me all sorts of questions about the ImClone trades. She asked me if the Martha trade was solicited. I said no. Was it?”
Bacanovic, who tended to speak at a rapid-fire pace under normal circumstances, now started yelling, the words pouring forth in a torrent. “It was tax-loss selling! It was tax-loss selling!” He said he and Stewart had a preexisting plan that had to be executed before the end of the year.
Faneuil tried to interrupt, but he couldn’t say anything, because Bacanovic talked right over him. “It was tax-loss selling. Right? Right? Right?” Faneuil still hadn’t been able to get an answer as to whether the trade was solicited or not. Faneuil was silent.
“Okay?” Bacanovic asked. Faneuil still didn’t answer. “Okay?” Bacanovic pressed.
“Okay,” Faneuil finally mumbled.
Faneuil tried to calm himself. So this is how it’s going to be, he thought. His mind was reeling. Bacanovic wasn’t dealing with reality. He, Faneuil, had conveyed the Waksal news to Stewart and she decided to sell. No other explanation was even remotely true. The tax-loss-selling explanation was preposterous. Tax-loss selling requires selling shares at a loss to offset gains, and these shares had been sold at a gain. He thought he and Bacanovic could have dealt with the situation, but he hadn’t been able to get a word in. He was worried, but surely, he thought, Bacanovic would come to his senses.
That night, New Year’s Eve, Faneuil went out with Haskell and some friends and started drinking. Eventually he and a few others, all “wasted,” as Faneuil put it, ended up at a Brooklyn club called Luxx. Faneuil took some of the recreational drug Ecstasy, something he almost never did, hoping to erase from his memory the previous day’s events. He stayed out until 6:00 a.m.
T
he day after New Year’s, Monaghan summoned Faneuil to her office at 10:00 a.m. Jim Porz, head of the Rockefeller branch office, was there, so he knew this was a big deal. Snyder, the compliance officer, was on the phone. “This is a big deal,” Snyder said, raising his voice. “I don’t know what the hell happened, but someone is going down for this. Heads are going to roll! You are going to be questioned by law enforcement. This is huge.” Faneuil was terrified. Monaghan tried to reassure him, and said she’d go with him to Merrill’s compliance offices on lower Broadway and that Merrill Lynch lawyers would be there to represent his interests. “Doug, just tell the truth,” Porz told him once he calmed down. “Everything will be all right. Just make sure you tell the truth and you’ll be fine. It’ll be simple, a walk in the park. I know you’re a little bit nervous, but you’ll be fine.”
he day after New Year’s, Monaghan summoned Faneuil to her office at 10:00 a.m. Jim Porz, head of the Rockefeller branch office, was there, so he knew this was a big deal. Snyder, the compliance officer, was on the phone. “This is a big deal,” Snyder said, raising his voice. “I don’t know what the hell happened, but someone is going down for this. Heads are going to roll! You are going to be questioned by law enforcement. This is huge.” Faneuil was terrified. Monaghan tried to reassure him, and said she’d go with him to Merrill’s compliance offices on lower Broadway and that Merrill Lynch lawyers would be there to represent his interests. “Doug, just tell the truth,” Porz told him once he calmed down. “Everything will be all right. Just make sure you tell the truth and you’ll be fine. It’ll be simple, a walk in the park. I know you’re a little bit nervous, but you’ll be fine.”
Faneuil immediately returned to his cubicle and again called Bacanovic. “Jesus, Peter. They sat me down. Porz said heads are going to roll. I’ve got to testify.”
Bacanovic started repeating the tax-loss-selling story. Once again, he spoke in such a rapid-fire style that Faneuil couldn’t say anything. Bacanovic never said that this is the story Faneuil should tell the SEC, but to Faneuil, the implication was obvious. Then Bacanovic hung up.
Moments later Bacanovic called Faneuil with some routine questions about other accounts and what was happening at the office. He made no mention of Stewart or the SEC. It was as if their earlier conversation had never happened.
Faneuil was torn. He decided he would do his best not to lie. He was certainly not going to repeat the tax-loss-selling explanation, which made no sense. He wasn’t going to tell Bacanovic’s lies for him. On the other hand, he didn’t want to get Bacanovic into trouble. Bacanovic had done so much for him. He’d treated him well. He was his boss and he felt he owed him a duty of loyalty. It was becoming obvious that telling Stewart about the Waksal trading was improper at best, possibly illegal. He didn’t want to get into that. He decided he’d be as truthful as possible, short of implicating Bacanovic in something bad.
The next morning, when Faneuil got into the office, he was shocked when Monaghan said they were going downtown and he’d be testifying that very day. He thought he had at least another twenty-four hours to prepare himself. They took the subway, and when they arrived at 222 Broadway, an array of lawyers was waiting: Marcus, Snyder, and two others. Faneuil was terrified, but he managed to repeat his story, leaving out the details about the Stewart trade. When they finished questioning him, Marcus said they were going to call the SEC. He had his hand on the speakerphone ready to place the call, and then stopped. “Before we do,” he said, “we want you to know you don’t have to go through with this. You don’t have to talk to the SEC if you don’t want to. We can all go home right now. And you can get your own lawyer too.” He said Merrill would pick up the fees.
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