And thus sprouted a very big weed in Martha Stewart’s 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 isn’t 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 Tyco’s CEO allegedly did. She’s 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 wouldn’t review the company’s cancer drug called Erbitux. (If she’d 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 ImClone’s fate than she’s 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 l’affaire Martha isn’t just about ImClone. It has also pulled back the crushed-velvet curtain on the clubby world of New York’s 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, Stewart’s 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 that’s put Martha smack in the middle of the one thing in the world she hates the most–a 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, didn’t bruise her for long. We’d finally come to accept her. She was tough. She was a survivor. Time and time again, Martha had been given lemons, and she’d 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 wouldn’t be approved after all. According to congressional investigators, the next day Waksal attempted to sell 72,000 shares before news of the FDA’s decision broke. When ImClone’s 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, Aliza’s 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 wouldn’t he have wanted to pass along that information to Stewart? “He’s the one that’s 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.
It’s 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 don’t 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, that’s 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 don’t remember any paperwork,” says Patrick McMullan, who is something of the official photographer to New York society, as well as a client of Bacanovic’s. “Sometimes there would be an order written, but sometimes he’d say, ‘Look, I’ll 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 didn’t 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 Martha’s softly.
Even though he is more of an employee than a peer, Bacanovic, 40, was a full-fledged member of the Waksal-Stewart universe. He’s accompanied Martha on photo shoots for her magazine (though it’s 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 Tiffany’s.” 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 can’t 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 one’s 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, Martha’s just brought out her own line of linoleum. (Who knew Martha even approved of linoleum?) The question is whether Stewart’s 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 (Martha’s personal hit on her 31 million shares: $94 million). More than most corporations, Stewart’s is unusually sensitive to criticism because her image and the business are so closely entwined. But not everyone thinks that bad Martha publicity will hurt–after all, it’s hardly new. “There’s 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 don’t 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 can’t be on TV anymore–well, that would be a crippling blow.”
At the moment, the chances of Martha’s going to prison are unlikely, though cartoonists are already having a field day imaging how she’d 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 didn’t talk to her on Dec. 27, he’s probably not a source of trouble. It’s 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. That’s the way this jet-set crowd works.” But Martha–who worked as a stockbroker in the ’70s–would still have had to know she was acting on insider information, and no one has asserted that she did. “I haven’t 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 timing–or 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, Tauzin’s segment also featured him promoting his own book. Its title: “Cook and Tell.”
