22 JUNE 2002: THE INSIDERS
The Insiders
The stock scandal involving
Martha Stewart has pulled back the curtain on a world where the rich pass
around business gossip the way the help passes out canapes
By Marc Peyser
NEWSWEEK
July 1 issue
It was two days after Christmas, and Martha Stewartmagazine editor, TV
host, syndicated columnist and high priestess of domesticitywanted to
get away from it all. She was flying with two friends from Connecticut
to Mexicos ultratony Las Ventanas resort (a junior suite starts at $585)
when her private jet stopped in San Antonio, Texas, to refuel. Just like
the rest of us hardworking folks, she called her office to check her messages.
The most important one was from her broker, Peter Bacanovic, and Stewart
had her assistant patch him into her cell.
BACANOVICS NEWS: ONE of her stocks, a high-flying biotech company called
ImClone, had dropped below $60, the price at which she says they had previously
agreed to sell. Stewart told Bacanovic to dump her 3,928 shares. Then she
did something that only the Martha Stewarts of this world can do. She dialed
Sam Waksal, who just happened to be the CEO of ImClone, not to mention
one of Marthas closest friends. Somethings going on with ImClone, Martha
said in her message, and I want to know what it is.
And thus sprouted a very big weed in Martha Stewarts well-manicured life.
In the past few weeks, Stewart has found herself drawn deeper and deeper
into another one of those Wall Street scandals that turn the rich and powerful
into losers. Martha isnt accused of setting up phony off-balance-sheet
companies like the Enron boys, or of borrowing an obscene amount of money
from her own corporation like the guy at WorldCom. Nor did she pretend
to ship art works out of state to avoid sales taxes, as Tycos CEO allegedly
did. Shes being questioned on the more mundane issue of insider trading,
for selling her ImClone shares (and banking $228,000) just a day before
the FDA announced it wouldnt review the companys cancer drug called Erbitux.
(If shed sold after the FDA announcement, it would have cost her $43,000.)
Stewart denies any wrongdoing, but the heat keeps rising. Just days after
the congressional committee investigating ImClone seemed to be backing
away from Martha, Merrill Lynch last week abruptly put her broker on leave.
Investigators, who hope to interview Bacanovic on Thursday or Friday, now
say they are specifically targeting the nature of his conversation with
Martha on Dec. 27 for evidence that she knew more about ImClones fate
than shes saying. For politicians eager to make a show of frying high-profile
CEOs, they may be closer to reeling in a very big fish.
But laffaire Martha isnt just about ImClone. It has also pulled back
the crushed-velvet curtain on the clubby world of New Yorks social elite,
a place where the rich and powerful pass around insider business gossip
as readily as the help passes out smoked-salmon canapes. With post-Enron
investors already questioning the fairness of the marketplace, Stewarts
case is the most visible reminder yet that folks on the inside get richer
while the rest of us watch our 401(k)s shrivel. And thats put Martha smack
in the middle of the one thing in the world she hates the mosta mess.
The irony is that, for a brief, shining moment, it seemed like people were
getting tired of bashing Martha Stewart. The latest tell-all book, Martha,
Inc., got lousy reviews and faded after a few weeks. Saturday Night Live
parodied her only twice this season. One skit made her look downright heroic,
with the SNL Martha stitching a needlepoint napkin that read suck it,
osama. Even the bankruptcy of Kmart, where Stewart has been selling her
housewares since 1997, didnt bruise her for long. Wed finally come to
accept her. She was tough. She was a survivor. Time and time again, Martha
had been given lemons, and shed always found a way to make sparkling ginger-plum
lemonade.
This time, she may need a heavy-duty juicer. The case against Martha will
come down to what she knew about ImClone, when she knew it and, most important,
how she got the information. Just before Stewart dumped her stock in December,
ImClone was a very hot company. Erbitux, a miracle cancer drug that was
its primary product, had already appeared on the cover of BusinessWeek,
and the FDA had accelerated its process for approving it. But suddenly,
something went wrong. On Dec. 26, Waksal learned that the government found
the Erbitux clinical trials to be inadequate, and it wouldnt be approved
after all. According to congressional investigators, the next day Waksal
attempted to sell 72,000 shares before news of the FDAs decision broke.
When ImClones lawyers stopped him, he allegedly attempted to give his
shares to his daughter Aliza, but was again blocked. (Aliza has refused
to comment.) Nonetheless, she unloaded her own 39,472 shares on the morning
of Dec. 27 for $2.5 million. Not coincidentally, Alizas broker was also
Bacanovic. Just hours after he is believed to have executed her sales,
he spoke to Stewart. If the daughter of the CEO was bailing out, surely
Bacanovic knew there was trouble, right? And wouldnt he have wanted to
pass along that information to Stewart? Hes the one thats either going
to blow this thing wide open or put it to bed in terms of Martha Stewart,
says Ken Johnson, a spokesman for the House committee. Bacanovic could
not be reached, and Merrill Lynch has refused to comment.
Its often said that New York is actually a very small town, and nowhere
is that more true than at the tippy-top of the social ladder. In the world
of black-tie parties and nonstop charity events, executive musings are
what make for idle cocktail chatter, at least after the guests finish gossiping
about who just had another face-lift. A lot of information is being passed
amongst each other just for reasons of talking, says David Patrick Columbia,
editor in chief of NewYorkSocialDiary.com. They dont even think of it
as insider information. In fact, while stockbrokers usually require the
little people to fill out a written order to automatically sell a stock
when it reaches a predetermined price, thats not always the case with
the Park Avenue crowd. Sometimes verbally he would say, We should sell
this when it gets to a certain point, and I dont remember any paperwork,
says Patrick McMullan, who is something of the official photographer to
New York society, as well as a client of Bacanovics. Sometimes there
would be an order written, but sometimes hed say, Look, Ill call.
And Stewart, Waksal and Bacanovic travel in an especially small social
circle. Waksal actually came to know Martha through her daughter, Alexis,
whom he once dated, even though Alexis is now 36 and Waksal is 54. Martha
and Waksal often talk on the phone as early as 6 a.m. She designed the
kitchen in his palatial Manhattan loft. He treats her like the royalty
she sometimes appears to think she is. Two years ago Waksal asked Martha
to be the guest of honor at the annual gala at the New York Council for
the Humanities, which he chairs. The guest of honor traditionally has made
a significant contribution to the humanities, which, despite her tireless
efforts to promote the importance of handmade paper, does not really apply
to Martha. The response by people invited to the benefit, says someone
affiliated with the organization, was close to incredulity.
Then again, Waksal is famous for over-the-top gestures. His 5,000-square-foot
apartment is littered with paintings by Picasso, de Kooning, Rothko and
Bacon$20 million in art. He hosts a monthly salon, inviting dozens of
people to hear an artist or writer discuss his work. And his Christmas
parties are lavish and legendary. The guests (Mick Jagger showed up last
year) are always A list. So A list that two years ago, some high-priced
call girls managed to slip through the front door. This year Waksal had
someone checking names, though, presumably, they didnt bother with Martha.
When she breezed through the door, the buzz from the roomful of politicos
and power brokers grew noticeably quieter. Waksal abruptly stopped his
conversation and walked over to her. For a brief moment, his head touched
Marthas softly.
Even though he is more of an employee than a peer, Bacanovic, 40, was a
full-fledged member of the Waksal-Stewart universe. Hes accompanied Martha
on photo shoots for her magazine (though its Waksal whose picture turned
up in a spread last year about her backyard birthday party). Bacanovic
has been friends with Alexis Stewart for more than 20 years and was the
person who helped introduce her to Waksal, when Bacanovic was the director
of business development at ImClone in the early 90s. Perhaps just as important,
he shares with Stewart (born Martha Kostyra, to a working-class Polish
family in New Jersey) and Waksal (the child of two Holocaust survivors
who got a Ph.D. in immunology from Ohio State) the tireless desire to climb
the social ladder. Bacanovic delights in telling people that he lives in
the town house used to shoot the exteriors for Breakfast at Tiffanys.
Bacanovic has also made a name for himself as a walker, a single man
who often escorts well-heeled older women to social functions. Even rarer
in that rare breed, he actually insists on paying his own way. Peter Bacanovic
is one of my dearest friends, says Nan Kempner, widely considered to be
the grande dame of New York high society. He is probably the most honest,
conscientious, generous, kind, sweet, wonderful, intelligent person I know.
I just cant believe that he has done anything scandalous. Though he can
be a tad shallow. When he was interviewed for an interior-design book called
Bright Young Things, he was asked, What to your mind would be the greatest
of misfortunes? His answer: For ones child to predecease you and male-pattern
baldness.
For Martha, the greatest misfortune may be that the scandal comes when
her own company is thriving. Martha Stewart Living Omnimedia is performing
so well, Marthas just brought out her own line of linoleum. (Who knew
Martha even approved of linoleum?) The question is whether Stewarts company
can keep up that steam in the middle of a PR storm. The stock is down 16
percent since news broke of her involvement with ImClone (Marthas personal
hit on her 31 million shares: $94 million). More than most corporations,
Stewarts is unusually sensitive to criticism because her image and the
business are so closely entwined. But not everyone thinks that bad Martha
publicity will hurtafter all, its hardly new. Theres a love-hate thing
with Martha. You always hear negative stories, says Laura Richardson,
an analyst for Adams, Harkness&Hill. In Bedford, N.Y., where Stewart
is building yet another home, folks are still talking about how she brought
homemade chocolate-chip cookies to win over the zoning board, only to insult
her neighbors by saying she wanted to enlarge her barn to block the view
of the ugly property across the street. Still, says Richardson, most readers
dont care about that. They accept her for what she is. What about stockholders?
If this turns out to be a temporary problem, the stock will weather it,
she says. If it means Martha cant be on TV anymorewell, that would be
a crippling blow.
At the moment, the chances of Marthas going to prison are unlikely, though
cartoonists are already having a field day imaging how shed spruce up
her jail cell. To be convicted of insider trading, Stewart would have to
know both that she was acting on insider information when she sold the
ImClone stock and that the person who gave her the information was trying
to illegally tip her off. Considering that Waksal said he didnt talk to
her on Dec. 27, hes probably not a source of trouble. Its more likely
that Bacanovic deduced that ImClone was sinking and acted accordingly.
If Martha Stewart was tipped off, we always thought it was from her broker,
says a congressional investigator. If Bacanovic was tipped by Aliza, he
probably called his A-list clients. Thats the way this jet-set crowd works.
But Marthawho worked as a stockbroker in the 70swould still have had
to know she was acting on insider information, and no one has asserted
that she did. I havent heard anything more than fairly weak, circumstantial
evidence against Martha Stewart, says Jack Coffee, a professor at Columbia
Law School.
But this is Martha Stewart, the woman who insists that visitors outside
her house walk in a prescribed direction so the grass will wear evenly.
She is not leaving anything to chance. Last week, just as the Energy and
Commerce Committee was poring over her records, Martha Stewart Living
broadcast an episode featuring Billy Tauzin, the congressman leading the
ImClone investigation. Talk about amazing timingor was it? In fact, the
Tauzin segment, in which the congressman cooks gumbo with Martha, first
ran a year ago. Oh, and by the way, Tauzins segment also featured him
promoting his own book. Its title: Cook and Tell.
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With Keith Naughton, Peg
Tyre, Tamara Lipper, T. Trent Gegax and Lisa Bergtraum
Arthur Magazine 