Dispatches From The Martha Stewart Trial

The “Cover-Up”, Part 5: Bacanovic Testifies at the SEC

Peter Bacanovic’s Feb. 13 testimony before the SEC was sworn, so this time his alleged false statements weren’t just alleged false statements, but alleged perjury (Count 6: “Perjury By Peter Bacanovic”):

  1. Referring to the Dec. 27 message he left for Martha Stewart, Bacanovic testified that the gist of it was to give Stewart the price of ImClone and ask her to please call him back. He denied telling Stewart’s assistant that the price was dropping. (The indictment doesn’t say if he was asked whether he told her it was about to drop.)
  2. Asked whether ImClone had come up as a topic of conversation during the January breakfast with Stewart, Bacanovic testified that Stewart had asked if he had spoken to Sam Waksal, and he had said no, and that was it. He also testified that ImClone did not come up in any other conversation between Dec. 28 and the date of his testimony.
  3. He described the conversation that led to the “$60 agreement,” which the U.S. attorney alleges is a fabrication.
  4. Asked if he had ever told Martha Stewart that the SEC was speaking with Merrill Lynch about ImClone, he testified that he told her that Merrill had been reviewing the trades internally but that he did not mention the SEC or that Merrill was looking into Stewart’s trades in particular.
  5. He testified that he had “notes” about the $60 conversation and described the allegedly altered worksheet. He then clarified that Stewart’s intention to sell ImClone at $60 was reflected on the sheet “in a very loose way,” and described (accurately) the types of marks on the page.
  6. He provided further testimony about how he and Stewart arrived at the $60 agreement (the prosecution believes everything about the agreement is false).

Bacanovic: The $60 understanding, continued

Bacanovic’s allegedly perjured SEC testimony contains much that we have heard before, and some things we haven’t. As far as the conspiracy charge goes, however—and, in fact, as far as many of the false statement charges go—the most important aspect of the testimony may well be the perjured statement that Bacanovic did not make: He did not claim that Stewart spoke to him on the 27th, not to Faneuil. In fact, he testified that Stewart spoke to Faneuil (the indictment doesn’t mention this, but a footnote on Page 103 of Stewart’s Motions memorandum does). In the first interviews, remember, the most problematic statements concerned the incorrect assertion that Stewart and Bacanovic had spoken to one another, a claim that, in addition to keeping the focus off Faneuil (and, thus, off the Waksal sale information), was probably demonstrably false.

This testimony, in my opinion, weakens the conspiracy theory, and going forward, it also creates a major inconsistency between Stewart’s and Bacanovic’s version of events. Perhaps by this time Bacanovic (or his attorneys) had realized that the claim was demonstrably false—no phone records to back it up—and, therefore, that it would be moronic to lie about. If this is what happened, though, and Bacanovic and Stewart were, in fact, conspiring, it is hard to believe that he wouldn’t have pointed this out to her. And because Bacanovic told the truth about who Stewart spoke with—apparently without agreeing with Stewart to modify this element of their alleged fable (she would later repeat the claim)—one wonders whether he wasn’t telling the truth when he made the allegedly perjured statements, as well (if you’re going to shoot straight about what was originally an important lie, why not do the same with everything else?). One also wonders whether, in his earlier interview with the SEC, when the investigators were presumably focusing mostly on the activities of Sam Waksal, not Martha Stewart, Bacanovic didn’t lie about having spoken to Stewart, but simply made a mistake. (Alternatively, it is possible that Stewart and Bacanovic conspired prior to the first round of interviews, but then stopped, or that, during his SEC testimony, Bacanovic just forgot what the fake story was supposed to be).

Bacanovic’s testimony also features a repetition of the claim that he and Stewart hadn’t discussed the ImClone investigation, which, again, if he and Stewart actually spoke at length that morning or the prior afternoon, seems hard to believe (if they didn’t speak, then the only other alleged post-trade contacts are the breakfast in January and two cell-phone calls). And the testimony also, of course, includes a repetition of the $60 story.

Here’s why, in contrast to most observers, I believe that the long-ridiculed $60 understanding may actually have existed. First, despite numerous claims to the contrary, neither Stewart or Bacanovic ever said the agreement was a “stop-loss order” or even formal enough to be “entered into” (as the SEC complaint puts it). When the Stewart story broke in June of 2002, one of the first gotcha! moments was the apparent “discovery” that no stop-loss order was found in Merrill Lynch’s computers. At least one commentator implied that the lack of such an order was clear proof that Stewart was a liar. *

As Bacanovic and Stewart have described it, moreover, the $60 understanding was not a formal stop-loss. It was simply a price level at which, Bacanovic and Stewart agreed, he would contact her, and she would sell her stock—an understanding, incidentally, that might not constitute standing “instructions” to sell the stock, as described in the affirmative defense section of Rule 10b5-1.

Because the $60 understanding is crucial to not only the alleged cover-up but the later alleged securities fraud, it is worth reviewing how Bacanovic, at least, described it in his SEC testimony:

Q: Did there come a time when she wanted to sell the ImClone stock?A: Well, it was at my solicitation.Q:Tell me about that.A: When we were doing her portfolio review for tax planning purposes that took place in the week prior to Christmas, it came to me as a great surprise, having felt that I had liquidated all ImClone shares from her accounts at that time, that the stock was still there.Q: Let me just—you had tax planning discussion with her?A: Which was also a portfolio review—a comprehensive portfolio review with her.Q: And this happened the week before Christmas?A: Correct.Q: So, approximately? A: I believe the exact date was December 20th, I believe.Q: And where did this take place?A: On the telephone. And we reviewed each and every position in the account. And we discussed the fundamentals of all the positions. We discussed gains and losses for all the positions. We discussed the overall status of the portfolio, and included in that discussion was ImClone. And so we reviewed ImClone and discussed what her intentions were for ImClone at that time versus my recommendations.Q: What were her desires for the ImClone stock?A: She felt—that the time, the stock had already come off its highs a little bit. And she wanted to hold the stock, and I challenged that by saying, “The stock has been declining, why would you hold it? Why are you holding this, considering that we sold 50,000 or 40,000 shares months ago?” … And she goes—and at that point, we determined that if, in fact, it fell much further, then we would sell it.(Testimony omitted…)Q: So, going back, she didn’t really want to sell it, you recommended that she sell it. You can continue on from there.A: So, we made a deal. I said, “Okay, if you would not like to sell the stock now, how long are you going to wait before you sell this stock?”Q: I’m sorry, on December 20th, when you had this conversation, do you remember what the price of the stock was?A: It was in the mid 60s. And, at that point, we determined that $60 a share would be a suitable price, should it ever fall that low. Of course, she never thought it would.Later testimony:Q: Who came up with the $60 price for ImClone? To sell?A: We quibbled over it. And so we came to this price together.Q: What was the price you recommended? Did you recommend a price—?A: I recommended an immediate sale.Q: So you wanted her to sell about—A: Right away.Q: And what did she come to you and say, “I’ll sell it at.”A:  She didn’t really have a price. I said, “Listen, what will you settle for? How low does this go before you’re prepared to part with this?” She said, “I don’t know.” I said, “Well, how about $60 a share? Does that sound reasonable?” And the conversation was something like that. She said, “Yes, sure, $60.”

To my ears, this testimony rings true. Financial advisers and clients have this kind of conversation all the time. If, moreover, as the prosecution suggests, the only part that is fabricated is the bit about the $60 understanding, then Bacanovic is very smooth. In contrast, another area of Bacanovic’s testimony—the part about the gist of the message he left for Stewart—rings false, at least when viewed in combination with the message itself. It is hard to imagine how Stewart’s assistant, Ann Armstrong, could have arrived at “Peter Bacanovic thinks ImClone is going to start trading downward” if, as Bacanovic testified, his message was actually to “please call us back, and also to please advise her that ImClone stock was whatever the price was at the time.” According to the SEC complaint, Faneuil was on the phone with Bacanovic when he left the message, so the prosecution will likely have two witnesses with which to try to prove that the testimony was perjured (Faneuil and Armstrong).

Correction, March 15, 2004: This dispatch originally stated, incorrectly, that Merrill Lynch’s computers “didn’t accept stop-loss orders for Nasdaq stocks.” As later testimony in the trial indicated, Merrill Lynch computers did indeed accept stop-loss orders for Nasdaq stocks. (Return to corrected sentence.)