Opinion ID: 792809
Heading Depth: 3
Heading Rank: 1

Heading: The events of December 27th, as told by Faneuil, Armstrong, Pasternak and Perret

Text: 14 During the last week of December 2001 and the first week of January 2002, Bacanovic was vacationing in Florida. Douglas Faneuil, a Merrill Lynch client associate in his mid-twenties who had been working as Bacanovic's assistant for about six months, was responsible for covering Bacanovic's desk when he was away. Between 9:00 and 10:00 on the morning of December 27th, Faneuil received several phone calls on Bacanovic's line from Sam Waksal's daughters, Aliza Waksal and Elana Waksal Posner, and from Waksal's accountant, Alan Goldberg. Prior to the opening of the market, Aliza Waksal placed a market order to sell all of her approximately 40,000 ImClone shares, which Faneuil executed. Shortly thereafter, Faneuil received a call from Alan Goldberg directing him to sell all of Sam Waksal's ImClone shares immediately. Faneuil advised Goldberg that he was unable to do so because of SEC rules restricting Waksal's trading of his company's shares. Goldberg informed Faneuil that, pursuant to facsimile instructions from Waksal that were dated December 26th (but not received at Merrill Lynch until December 27th), he was to transfer Waksal's entire holding of approximately 80,000 ImClone shares to the account of his daughter Aliza and sell it from there. Faneuil confirmed — with both Bacanovic and Merrill Lynch compliance personnel — his understanding that the proposed transaction was not permissible. Faneuil spoke with Goldberg five or six times by phone that day, and the transfer between accounts took place the following day, December 28th. Faneuil also received two calls that morning from Elana Waksal Posner regarding the sale of her ImClone shares; she expressed disappointment that the price was already going down. 15 Faneuil kept Bacanovic apprised of the details of the calls from the Waksal family by telephone. In the midst of one of their conversations, Faneuil heard Bacanovic say suddenly, Oh, my God, get Martha [Stewart] on the phone. With Bacanovic on the line, Faneuil placed a call to Stewart's New York office. Bacanovic left a message after being told by Stewart's assistant, Ann Armstrong, that Stewart was traveling. Armstrong logged the message as follows: Peter Bacanovic thinks ImClone is going to start trading downward. In a follow-up call, Bacanovic instructed Faneuil to tell [Stewart] what's going on when she returned the call. Faneuil recalled that Bacanovic expressly confirmed that Faneuil was to advise Stewart of Waksal's efforts to sell his ImClone stock, a communication that Faneuil knew would violate Merrill Lynch's client confidentiality policy. 16 At 1:18 p.m. Bacanovic sent an email to Faneuil inquiring as to whether any news had come out regarding ImClone; Faneuil responded that there had been nothing yet. Shortly thereafter, Stewart — who was en route to Mexico for a vacation with her friend Mariana Pasternak — called her office and was informed by Armstrong of Bacanovic's message. Armstrong transferred the call to Bacanovic's office, where Faneuil answered, Merrill Lynch, Peter Bacanovic's office. It is unclear whether Faneuil identified himself to Stewart. Faneuil told Stewart that, although there had been no news release from ImClone, Bacanovic thought she would like to act on the information that Sam Waksal was trying to sell all of his shares, at least those he held in Merrill Lynch accounts. Stewart asked Faneuil for a price quote and directed him to sell all of the ImClone shares that remained in her portfolio. 17 Stewart then placed a call to Sam Waksal, reaching his secretary Emily Perret. Stewart asked Perret if she knew what was going on with ImClone and told Perret to find Waksal. Perret informed Stewart that Waksal was not in the office, and she noted the call on Waksal's messages sheet for December 27, 2001 as follows: 18 1:43 Martha Stewart something is going on with ImClone and she wants to know what She is on her way to Mexico and she is staying at Los Vantanos [sic]. 19 Back in New York, Stewart's ImClone sell order was executed at an average price of $58.43 per share, yielding proceeds of approximately $230,000. Pursuant to Stewart's instructions, Faneuil sent an email to her personal account confirming the trade. Faneuil also informed Bacanovic that, after hearing that Waksal was trying to sell all of his ImClone shares, Stewart sold her own shares. 20 Several days later, while Stewart and Mariana Pasternak were visiting in Mexico, their discussion turned to the New Year's plans of various friends, and Pasternak inquired about Sam Waksal. Among other things, Stewart told Pasternak about the decline in ImClone's stock price, Waksal's efforts to sell his holdings, and her own sale. Pasternak later testified that she was either told by Stewart or was left with the impression that it was nice to have brokers who tell you those things, and she acknowledged knowing that Bacanovic was Stewart's broker. 21 2. The ImClone investigation and events after December 27th, as told by Faneuil, Armstrong, Glotzer, Farmer and Merrill Lynch compliance personnel
22 On December 28, 2001, the day following Stewart's ImClone sale, ImClone announced that the FDA had rejected its application for Erbitux approval. When the market next opened, on December 31, 2001, ImClone's stock price had dropped approximately 18 percent to $45.39 per share. Prompted by these developments, Merrill Lynch compliance personnel reviewed ImClone trade data preceding the announcement. Upon discovery of the sales by the Waksals and Stewart — all clients of Bacanovic — the matter was referred to Merrill Lynch senior management, who directed further inquiry. 23 Merrill Lynch compliance personnel contacted Faneuil and Bacanovic on December 31st with questions about the ImClone trades. Bacanovic, who was still out of town, told Merrill Lynch administrative manager Julia Monaghan that Faneuil handled the trades. He also said that Stewart's sale was part of her planned year-end tax loss selling. Monaghan then sought out Faneuil. Immediately after speaking with Monaghan, Faneuil called Bacanovic to confirm the accuracy of an answer he had given to Monaghan. Bacanovic, as though coaching Faneuil, repeatedly stated that Stewart's trade was made pursuant to a pre-existing plan for year-end tax loss selling to offset gains in other investments. Faneuil knew, however, that the timing of the ImClone sale and its gain to Stewart were inconsistent with a tax loss strategy.
24 Based on the results of its internal review, Merrill Lynch referred the ImClone matter to the SEC. The SEC launched an investigation, as did the FBI and the U.S. Attorney. On January 3, 2002, the SEC interviewed Faneuil by phone, focusing the inquiry on the Waksal family's trading on December 27th. With regard to Stewart's trade, Faneuil explained only that Stewart had called, requested a quote and decided to sell. He then reported the substance of the SEC interview to Bacanovic, using a borrowed cell phone to avoid any possibility that the call would be preserved on a Merrill Lynch taped line. On the following Monday, Faneuil approached Merrill Lynch about retaining outside counsel for him. 25 Soon after the January 3rd SEC interview, Faneuil received a call from Stewart's business manager, Heidi DeLuca, complaining that the ImClone sale generated a gain that compromised Stewart's tax loss selling plan and created a tax liability. Faneuil reported DeLuca's call to Bacanovic. Bacanovic then gave Faneuil a different explanation for the trade, insisting that Stewart sold the ImClone stock on December 27th pursuant to a pre-existing agreement to sell if the price dropped to $60 per share, although no such order had been entered into Merrill Lynch's computer system. Called as a defense witness at trial, DeLuca confirmed the existence of that stop-loss order. She asserted, however, that the conversation with Faneuil regarding the ImClone gain took place in February, rather than early January as Faneuil had recalled.
26 Upon returning to the office from vacation on January 7th, Bacanovic was questioned again by Merrill Lynch's Monaghan about Stewart's trade. Bacanovic told her that earlier in December, while he and Stewart were reviewing Stewart's portfolio and tax loss strategy, they decided to sell ImClone if the price dropped to or below $60 per share. He recounted the $60 per share stop-loss order story to the SEC in a telephone interview later that day, explaining that on December 27th he advised Stewart that ImClone had dropped below $60, and she told him to sell it. 27 After speaking to the SEC, Bacanovic took Faneuil out for coffee and a talk. Bacanovic explained Stewart's integral role in advancing his career and stressed his loyalty to her. Faneuil brought up the events of December 27th and reminded Bacanovic that he knew what really transpired, at which point Bacanovic asserted that Faneuil did not know what was going on that day and admonished Faneuil for being selfish. 28 When Faneuil returned from a week's vacation in mid-January, Bacanovic told him that he had met recently with Stewart and discussed the events of December 27th with her. Stewart's calendar, which Armstrong maintained, reflected a breakfast meeting with Bacanovic on January 16th. According to Faneuil, Bacanovic said to him, Everyone's telling the same story. This was a $60 stop-loss order. That was the reason for her sale. We're all on the same page, and it's the truth. It's the true story. Everyone's telling the same story.
29 On or around January 22, 2002, Stewart consulted with counsel from Wachtell, Lipton, Rosen & Katz, whose records reflect that work on MS/ImClone matters would be undertaken. Several days thereafter, Stewart's attorneys were contacted by the offices of the U.S. Attorney and the FBI, who asked to speak with her. Over the next week, Stewart met with and spoke by phone to her attorneys several times. At the end of one such call on January 31st, Stewart asked Armstrong to send to the law firm copies of messages that she had received during the period from December 26, 2001 through January 7, 2002. Stewart then asked Armstrong to show her the messages, including the entry for the December 27th message from Bacanovic. Upon reading the message, Stewart took the computer mouse from Armstrong and deleted and typed over a portion of the text so that what initially read, Peter Bacanovic thinks Imclone is going to start trading downward was revised to read, Peter Bacanovic re imclone [sic]. Immediately thereafter, Stewart told Armstrong to restore the message to the original, and Armstrong did so. 30 On February 4, 2002, in response to the SEC's request for an interview, Stewart met at the offices of the U.S. Attorney with two SEC enforcement attorneys, an Assistant United States Attorney and an FBI agent, all of whom were investigating the December 27th ImClone trading. Stewart told the investigators that in the fall of 2001, shortly after selling a portion of her ImClone stock to Bristol-Myers, she decided with Bacanovic to sell the remainder if the price fell to $60 per share. Stewart recounted receiving a message to call Bacanovic while she was en route to Mexico. Stewart said that she called Bacanovic, who advised her that ImClone shares were trading below $60, and directed him to sell all of her shares. She explained to the investigators that she wanted to take care of the matter at that time rather than be bothered during her vacation. She stated that she spoke with Bacanovic on December 27th, and she denied speaking with his assistant. Stewart added that during the call she and Bacanovic also discussed her company's stock as well as K-Mart. 31 Although Stewart had reviewed the message log reflecting the call from Bacanovic only four days earlier at Armstrong's desk, Stewart denied in the interview that she knew whether there was a written record of Bacanovic's message but agreed to check into the matter. Stewart also denied that she had discussed ImClone with Bacanovic during the week leading up to December 27th and said that her several discussions with him since that time had been limited to matters in the public arena. Although Stewart told investigators that Bacanovic had informed her that the SEC was questioning Merrill Lynch about the December 27th trading, Stewart also said that Bacanovic did not tell her whether he had been questioned or whether any questions involved her. Stewart said nothing at the interview about being aware of the Waksals' intentions to sell their ImClone shares on December 27th.
32 Bacanovic gave sworn testimony to the SEC on February 13, 2002, responding to questions about ImClone trading in the Waksal family accounts that he managed and about Stewart's holdings, including ImClone and her decision to sell on December 27th. He denied telling Stewart on December 27th of Waksal's efforts to sell his ImClone stock and stated that he would never discuss one client's transactions with another. Describing the events of December 27th, Bacanovic told investigators that Faneuil's phone calls to him regarding the Waksal family prompted him to remember Stewart's decision to sell her ImClone shares if the price dropped to $60 per share. Bacanovic commented that Stewart never thought that would happen. Bacanovic testified that Stewart made up her mind to sell the declining ImClone shares, which he believed she held out of loyalty to Waksal, at $60 per share during a comprehensive portfolio review with him on December 20th. He referred to a contemporaneous worksheet, which was later produced to the SEC, reflecting that and other decisions. 33 Bacanovic explained that no order was entered into Merrill Lynch's computer system to trigger the sale of ImClone because Stewart, like most of his clients, eschewed automatic execution in favor of having him track a stock and give notice if and when it reached the target price. Bacanovic told investigators that on December 27th he left a message with Stewart's assistant, advising her of ImClone's price and asking that Stewart [c]all my office. He stated that Faneuil later reported to him that Stewart called Bacanovic's line on the 27th and directed him to sell her shares. Bacanovic denied speaking with Stewart on that day. He also represented that in conversations since December 27th he and Stewart had discussed ImClone in general terms and that he had informed her of an internal Merrill Lynch review. He denied speaking with Stewart about her own ImClone trades, the government investigation, or the fact that he had been questioned about the events of December 27th.
34 On March 7, 2002, several weeks after Bacanovic's SEC testimony, Faneuil was interviewed by representatives from the SEC, the FBI and the U.S. Attorney's Office. He stated, as he had previously, that on December 27th, Stewart called for a quote and decided to sell. He did not mention to the investigators that during the call he informed Stewart of Waksal's efforts to sell, nor did he say that Bacanovic had told him to do so. When Faneuil reported this to Bacanovic, Bacanovic replied, good.
35 After receiving a copy of Sam Waksal's phone log, which reflected a call from Stewart on the morning of December 27th, investigators requested another meeting with Stewart, and she agreed to speak with them. During that April 10, 2002 interview, Stewart stated that she had no recollection of having been told on December 27th that any of the Waksals were selling their ImClone stock. Stewart was asked about Bacanovic's December 27th phone message, which Armstrong had entered in the log as Peter Bacanovic thinks ImClone is going to start trading downward. Stewart stated that she did not recall that Armstrong told her about the content of Bacanovic's message. Rather she recalled being told that Bacanovic called and wanted to speak with her before the end of the day. 36 On April 10th, the investigators also questioned Stewart about the message she left with Sam Waksal's secretary on the morning of December 27th, asking what was going on with ImClone. Stewart told investigators that she called Waksal on the 27th for the purpose of seeing how he was and making sure everything was okay. She also stated that when she was interviewed two months earlier on February 4th, she did not recall having made the call to Waksal.
37 During the period between February and May 2002, Bacanovic talked to Faneuil about the investigation approximately five times, each time reiterating to Faneuil that he had spoken with Stewart and that everyone was on the same page and telling the same $60 stop-loss story, which was the truth. During one such conversation in April or May, Faneuil reminded Bacanovic that it was Faneuil who spoke with Stewart on December 27th and that he knew what actually had been said. At that point, according to Faneuil, Bacanovic said, don't even say that, just don't even say that. Faneuil admitted at trial, however, that Bacanovic never explicitly told him to lie. A month or two later, in June 2002, although he had not been served with a subpoena, Faneuil admitted to Merrill Lynch and to the government investigators that he had lied twice to the SEC about the content of his December 27th phone conversation with Stewart. Faneuil testified at trial that the lies and subsequent cover-up became too much to bear. Faneuil entered into a cooperation agreement with the Government, pleading guilty to the misdemeanor charge of receiving money or things of value as a consideration for not informing against a violation of the law in violation of 18 U.S.C. § 873. He agreed with the SEC to a lifetime exclusion from work in the securities industry. 3. Stewart's June 2002 public statements 38 In June 2002, media reports stated that a congressional investigation into the FDA's denial of the Erbitux application had revealed the December 27th ImClone transactions by Waksal and Stewart. Thereafter, the value of MSLO shares declined, which resulted in a corresponding decrease in Stewart's net worth. Stewart issued two public statements, one in a press release and one addressed to a conference of securities analysts and advisors. Stewart explained that her sale had been triggered by the pre-existing decision to sell ImClone if and when it reached $60 per share and not by information that was unavailable to the public. She also represented that she had cooperated fully with government investigators. MSLO shares enjoyed a modest rebound.