Around the time that Douglas Faneuil received the Waksals' sale requests (four hours before he spoke to Martha Stewart), ImClone's stock started trading down sharply on high volume (often a sign of trouble), and rumors began to fly that the company's Erbitux application was going to be rejected or delayed. By the time Stewart called that afternoon, ImClone's stock was down about $5 from its opening price, or nearly 10 percent, on about five times its usual trading volume (often a major sign of trouble). If Faneuil was even remotely competent (professionally speaking), he would have relayed this information to both Bacanovic and Stewart. If Bacanovic and Stewart were even remotely competent (cognitively speaking), they would have interpreted the information as a sign that the market might know something they didn't (that ImClone's FDA application was going to be rejected, for example). They might also have expected that such news might soon be released publicly. At 1:18 p.m., just before Stewart's plane landed in Texas, Bacanovic sent Faneuil an e-mail:
Has news come out yet? Let me know. Thx, P
So, assuming that Douglas Faneuil had a practice of also relaying publicly available information to clients, by 1:40 p.m. on Dec. 27, in the middle of her call with him, Martha Stewart probably possessed the following public information:
- The market was awaiting an imminent announcement that would likely make or break ImClone's stock for the foreseeable future.
- ImClone's stock had suddenly lurched downward on extreme volume.
- Rumors were swirling that the FDA would reject or delay the Erbitux application.
At the same time, Stewart also possessed the following nonpublic information:
- Two months earlier, she tried to sell all of her ImClone stock for $70 per share.
- One week earlier, Bacanovic recommended that she sell the rest for about $63 per share.
- Now, with the stock trading down sharply, on high volume, amid rumors of a negative development, the price was near $58.
Depending on whom you believe, Stewart might also have possessed an additional piece of nonpublic information:
- She had previously agreed with Bacanovic that she would sell her ImClone stock if it broke $60 a share.
That afternoon, in other words, Martha Stewart probably had lots of information about ImClone's stock, some public, some private—more than enough information, certainly, to decide to sell. Stewart also, probably, felt like an idiot: The stock was now down about $12 from where she tried to sell it, about $5 from where Bacanovic told her to sell it, and about $2 from where she (allegedly) agreed to sell it. Unlike the 1990s, the prior two years had probably reminded her (as they had millions of others) how painful it was not to take a profit when you had one. The facts, rumors, and ImClone stock action, moreover, suggested that more of Stewart's profit was about to evaporate.
To this "mosaic" of information, the 27-year-old broker's assistant, Douglas Faneuil, allegedly added one more tidbit: Sam Waksal himself was trying to sell ImClone stock. Why did Faneuil add this information? Perhaps because, as he now says, Peter Bacanovic told him to. Perhaps because the famously demanding Stewart pried it out of him. ("Are those the only reasons you think I should sell?") Perhaps because, as Bacanovic will probably testify, Faneuil decided to volunteer it on his own: He was a broker's assistant, after all, and he was talking to Martha Stewart—Martha Stewart!—and he was presumably eager to demonstrate that, for her especially, he was willing to go the extra mile. Ironically, whatever the reason, if the Waksal information was, as the U.S. attorney contends, material nonpublic information, Faneuil's sharing it did not help Martha Stewart at all. On the contrary, it screwed her. Why? Because, in insider trading cases, material nonpublic information does not have to be the cause of a trade; the trader merely has to be "in possession of" it. Legally, in other words, if the Waksal sell orders were material nonpublic information, Faneuil made it impossible for Martha Stewart to trade.
But wait. Maybe, in context, the information was not, in fact, "material." Maybe it wasn't even "nonpublic." Were Douglas Faneuil and Martha Stewart sure that the market hadn't already received similar information? Investors had already chopped off nearly 10 percent of the stock's value in four hours—someone must have known something. Maybe the Waksals were selling stock through other brokerage firms (they were), in which case the news might have been all over the Street (it might have been). And what did Faneuil say, exactly? (It matters a lot.) Did he say, "Ms. Stewart, between you and me, our client Sam Waksal asked us to sell his stock this morning"—in which case, Faneuil would have breached his fiduciary duty to Waksal and violated Merrill policy? Or did he say, less directly, "I have it on good authority [wink, wink] that Sam Waksal and his family are selling"? Or did he say, even more circumspectly, "Rumor has it that insiders, including the Waksals, are bailing"? In the first instance, Faneuil would have been giving Stewart privileged information (which she probably would have known was privileged). In the second, her view of whether the information was public would depend on how she interpreted Faneuil. In the third, he might just have been passing on a market rumor.
And back to the question of materiality. All Faneuil knew was that Waksal wanted to sell the stock he held at Merrill Lynch, stock that represented a tiny percentage of Waksal's overall holdings. (Earlier that year, Waksal owned 4.6 million ImClone shares and options; Faneuil was ordered to sell less than 2 percent of them.) Company insiders sell stock all the time. Three weeks earlier, for example, Waksal's brother Harlan, ImClone's chief operating officer, announced plans to sell 700,000 ImClone shares—nearly 10 times what Sam Waksal wanted to sell on Dec. 27—and the stock barely budged. (What insiders don't usually do is sell in a panic, so if Faneuil told Stewart anything about Waksal's perceived state of mind, this could be as important as what he said about the attempted sale.) Also, on further consideration, would it really have been reasonable to assume that Waksal, ImClone's CEO, was trying to sell because he had advance notice that the FDA was going to reject the Erbitux application? Could the CEO of a major corporation really be that stupid? (As it turns out, yes; at the time, though, a reasonable investor would probably have assumed Waksal to be selling for another, less asinine, reason.)
Perhaps, on the tarmac in San Antonio, given her experience as a stockbroker, Martha Stewart made a split-second analysis about whether Faneuil had given her material nonpublic information. If she concluded that he had, perhaps she then analyzed whether the information had been "misappropriated" (the second of two factors required for the trade to be illegal). If the answer to this question was also "yes" and then she sold her stock anyway, she would probably be guilty of insider trading. If she knew enough about insider trading law to come to the first two conclusions, however, she might just as easily have concluded that, thanks to Faneuil, she could no longer legally trade, and she might have called Peter Bacanovic, demanded that Merrill cover her losses and insisted that Faneuil be fired.
Perhaps, though, given the total mix of information—three days until the FDA deadline, rumors flying that the application would be rejected, the stock trading down sharply on high volume, Stewart's previous (alleged) agreement with Bacanovic, the phrasing with which Faneuil (allegedly) conveyed the Waksal information—Stewart instead concluded that the Waksal sell orders were just an additional data point in a mosaic of information that screamed "SELL!"—thought-provoking, yes, but misappropriated, material nonpublic information, no. And, perhaps, having concluded this, eager to get on her way to Mexico and put the ImClone headache behind her, she told Faneuil to dump her stock.
In any case, at 1:41 p.m., after placing her sell order with Faneuil, Stewart made her third and final phone call from San Antonio—to Sam Waksal himself. She didn't reach him, but she did leave a message, which was transcribed as: "Martha Stewart something is going on with ImClone and she wants to know what. She is on her way to Mexico she is staying at Los Ventanos." Unless one assumes that Stewart was already covering her tracks—a theory that would require her to possess far more criminal subtlety than she allegedly displayed later—this message alone cripples the theory that originally triggered the investigation: that she sold her ImClone because Waksal tipped her off about the FDA rejection. It also, in my opinion, suggests that the "attempted sale" might not have been as important to her decision as it has subsequently been made out to be. (If her main question for Waksal was, "Why are you selling?" her message might be more damning.)
With the benefit of hindsight and experience, we can see Stewart's mistake: either she committed a crime, or she failed to realize (or care) that, for practical purposes, the "appearance of impropriety" and "impropriety" are the same thing. If Stewart had already had the harrowing experience of being the subject of an investigation (the main lesson of which is that the person whose job it is to impartially evaluate the evidence is the last person you'll meet, not the first), or if she hadn't been on her cell phone at an airport halfway to Mexico with a dozen other things on her mind, she might have handled the situation differently. She might have concluded, for example, that—even if ImClone were about to go to zero—the potential reward from the trade didn't even come close to offsetting the potential risk. She might have kept her stock, taken the relatively tiny hit, and gotten on with her life. Ah, but we're all Warren Buffett in hindsight.