Tangled Webs (23 page)

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Authors: James B. Stewart

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At the time she turned down the plea bargain, Pedowitz claimed Stewart was making a business decision. The prosecutors never bought that rationale. They thought it was an emotional decision. Stewart the perfectionist simply couldn’t admit wrongdoing. But if it was a business decision, it was a singularly bad one, for the adverse impact of her conviction may have been most severe at her company. Martha Stewart Living Omnimedia shares continued to rise on news of her release from prison, hitting a high of $33 in September 2005. But the company’s most lucrative deal, a licensing and merchandising arrangement with Kmart (subsequently merged with Sears), was terminated in 2009. Ad sales and circulation at her flagship magazine plunged. The company reported an operating loss of $12 million for 2009 and its shares sank to just over $2 in the wake of the 2008 financial crisis, far lower than at any time during Stewart’s investigation, trial, or incarceration. (They recovered along with the market in 2009–10, but by late 2010 were less than $5 a share, a small fraction of their former value.)
Though Stewart remains very wealthy, she is nowhere near the billionaire she once was. Her company’s share plunge seriously dented her net worth, since she owned 50 percent of the stock and 90 percent of the voting shares, which represent the bulk of her fortune. By mid-2010 the market capitalization of the company was $300 million, valuing Stewart’s stake at $150 million.
Of course, there’s no way to know how Martha Stewart Living would have fared had Stewart pleaded guilty and avoided a prison term, as seemed possible, or had she never acted on the Waksal tip in the first place, which would have freed her to devote all her considerable energy to promoting her business. At one point Stewart herself estimated the cost of her ordeal at $1 billion; counting total shareholder losses, it surely is much more. Given that Stewart saved herself just $46,000 on the trade, the sale of ImClone and subsequent cover-up surely ranks as one of the most ill-fated white-collar crimes ever.
Peter Bacanovic served his sentence at Nellis Air Force Base, which houses a minimum-security federal prison fifteen miles north of Las Vegas. He was released to home confinement in his Upper East Side apartment in June 2005. Like Stewart, Bacanovic has continued to assert his innocence and maintains he was wrongly convicted. In late 2006, he told
New York Times
reporter Landon Thomas, referring to prosecutor Michael Schachter, “I’m not interested in lying to serve an overzealous thirty-two-year-old prosecutor. I stood by my friend and client and told the truth.”
It cannot be said that Stewart has stood by him. As with Armstrong and Pasternak, she never spoke to him again, and dropped him, too, from her Christmas card list. As the SEC’s civil charges of insider trading neared a trial date, and Stewart’s refusal to settle forced Bacanovic to face the prospect of another expensive trial, this time without Merrill Lynch to pay his bills, Bacanovic swallowed his pride and called his old friend Alexis Stewart to ask for financial assistance, the
Times
reported. “No one here feels we owe you anything,” Alexis replied.
Indeed, people close to Stewart emphasize that it was Bacanovic who dragged her into the entire mess by instructing Faneuil to tell her about the Waksals’ trading. If not for Bacanovic, she would have continued her vacation trip to Mexico blissfully unaware that the Waksals were in trouble or that the FDA had turned down the Erbitux application. And one of the ironies of the case is that ultimately the FDA did approve Erbitux for treatment of colon cancer. In October 2008 Eli Lilly acquired ImClone for $70 a share–more than $10 a share higher than when Stewart sold. Had she simply held her shares she would have earned a significant profit.
On the other hand, from Bacanovic’s point of view, had he failed to tell Stewart that the Waksals were selling, she would have been furious and would likely have fired him as both her broker and the broker for the pension account. Given the losses in her account, Bacanovic was already on thin ice. That, of course, is no justification for violating Merrill Lynch’s policy of confidentiality or for passing on inside information. Bacanovic might have lost Stewart as a client and celebrity friend, but he’d still have his career and reputation.
In August 2006, Stewart and Bacanovic resolved the SEC case by neither admitting nor denying they had engaged in insider trading and conspiracy, as is common in SEC civil suits. They received the same penalties they would have had they admitted the charges. Stewart disgorged the losses she avoided and a penalty of three times that amount, or $195,000. Bacanovic was fined $75,000 for his role in the conspiracy. Stewart was banned from serving as a director of a public company, including her own, for five years, a term that expires in 2011. From the SEC’s point of view, Stewart had indeed engaged in insider trading, even if she’d never faced criminal charges for it.
Bacanovic told friends he planned to become a Hollywood producer, something he’d mentioned to Faneuil that he’d always wanted to do. He rented an apartment in Los Angeles and divided his time between there and New York. But no producing career materialized. In 2008 he was hired to be chief executive of vintage jewelry retailer Fred Leighton, a fixture on Madison Avenue that was expanding in Las Vegas and Beverly Hills. Merrill Lynch, which had financed the company’s acquisition and expansion, objected to hiring a felon. Bacanovic was fired in 2009 after Leighton entered bankruptcy proceedings. In 2010 he appeared on a television reality show,
High Society
, seated next to aspiring socialite Tinsley Mortimer, the star of the series.
In part due to strains that had developed during the three-year investigation and trial, Douglas Faneuil and Rob Haskell ended their relationship about the time Faneuil was sentenced. Haskell subsequently enrolled in medical school at Brown University. Faneuil left Manhattan and moved to the Sunset Park neighborhood in Brooklyn. When the gallery where he was working closed in 2004, he continued to manage the owner’s personal art collection. He has also been raising money and working on a documentary film about how suicide affects the people left behind, inspired by the death of his sister. Though struggling to make ends meet, he’s been able to live the more creative existence he now feels he should have embraced from the start.
Part Two
 
I. LEWIS “SCOOTER” LIBBY
 
FOUR
 
“This Is Hush- Hush”
 
O
n January 28, 2003, President George W. Bush arrived at the Capitol for his third and most eagerly anticipated State of the Union address. A year before, just four months after the attacks on the World Trade Center transformed his administration into a wartime presidency, he had proclaimed the war on terror, identified the “axis of evil,” and vowed to bring Bin Laden to justice. Now, a year later, Bin Laden was still at large and the administration’s attention had shifted from Afghanistan to Iraq. As he reminded Congress, the millions watching on television and, for the first time ever, on a webcast:
Today, the gravest danger in the war on terror, the gravest danger facing America and the world, is outlaw regimes that seek and possess nuclear, chemical and biological weapons.
 
Frequently interrupted by applause, Bush laid out the broad rationale for war, then turned specifically to the threat posed by Iraq, leaning heavily on intelligence that Saddam Hussein was developing and possessed weapons of mass destruction.
President Bush laid out a chilling inventory of Saddam’s suspected deadly weapons: 25,000 liters of anthrax; 38,000 liters of botulinum toxin; 500 tons of sarin, mustard, and VX nerve agents; and “30,000 munitions capable of delivering chemical agents.” But none of these were more deadly or posed a more serious threat than nuclear weapons:
The International Atomic Energy Agency confirmed in the 1990s that Saddam Hussein had an advanced nuclear weapons development program, had a design for a nuclear weapon and was working on five different methods of enriching uranium for a bomb.
The British government has learned that Saddam Hussein recently sought significant quantities of uranium from Africa.
Our intelligence sources tell us that he has attempted to purchase high-strength aluminum tubes suitable for nuclear weapons production.
 
It was not only that Saddam Hussein was pursuing and might possess nuclear weapons. It was what he was likely to do with them:
Before September the 11th, many in the world believed that Saddam Hussein could be contained. But chemical agents, lethal viruses and shadowy terrorist networks are not easily contained.
Imagine those nineteen hijackers with other weapons and other plans, this time armed by Saddam Hussein. It would take one vial, one canister, one crate slipped into this country to bring a day of horror like none we have ever known.
We will do everything in our power to make sure that that day never comes.
 
The president was interrupted by resounding applause. This, in essence, was the American brief for war.
Soon after, on February 5, 2003, President Bush dispatched his secretary of state, Colin Powell, to the United Nations to make the case to the international community. Powell, the general and war hero who had led U.S. forces in the first Gulf War, Operation Desert Storm, had won an important tactical victory over the Defense Department by persuading Bush to seek UN support before invading Iraq. Unlike that of some in the administration, Powell’s credibility and integrity were unquestioned, and he was determined not just to assert the Iraqi threat but also to document it.
In a televised address to the United Nations Security Council in February, often compared to Adlai Stevenson’s galvanizing UN speech during the Cuban missile crisis, Powell used previously secret intercepted communications and satellite photos to document Iraq’s alleged mobile chemical weapons facilities and nuclear weapons program.
“Saddam Hussein already possesses two out of the three key components needed to build a nuclear bomb,” Powell told the UN. “He has a cadre of nuclear scientists with the expertise, and he has a bomb design. Since 1998, his efforts to reconstitute his nuclear program have been focused on acquiring the third and last component, sufficient fissile material to produce a nuclear explosion. To make the fissile material, he needs to develop an ability to enrich uranium. Saddam Hussein is determined to get his hands on a nuclear bomb.”
Powell did not repeat the president’s assertion that Iraq was seeking uranium in Africa. But Powell knew his reputation and credibility were on the line. He insisted that CIA director George Tenet sit directly behind him during the speech, visible to the cameras, to demonstrate that the CIA stood behind Powell’s claims.
However eloquent, Powell’s efforts didn’t result in any UN resolutions in support of war. On March 19 U.S. forces began an air bombardment of Baghdad and invaded the next day. Bush famously declared an end to hostilities on May 1 in a speech from the deck of the aircraft carrier USS
Abraham Lincoln
. Attention shifted immediately to the search for Iraq’s weapons of mass destruction. There were several false alarms, such as the discovery of the suspected mobile facilities described by Powell. But they turned out to be for making hydrogen or weather balloons, not biological weapons. When no evidence of any weapons of mass destruction surfaced after a month of intense searching by U.S. and coalition forces, the mission was handed over to the Iraq Survey Group. It ended its work in 2004, concluding that there was no evidence that Iraq had produced or stockpiled WMD since UN sanctions were imposed in 1991. President Bush, Vice President Cheney, and their advisers were shocked and disappointed. The credibility of the CIA, which had assured them such weapons existed, plummeted.
However monumental this failure of intelligence, it still seemed to most to be an honest mistake on the part of the nation’s leaders, which included many congressional Democrats as well as administration supporters. They began to emphasize other reasons to depose Saddam Hussein, such as bringing democracy to the long-oppressed Iraqi people. It didn’t seem to occur to the president or his advisers that they might be accused of deliberately falsifying or manipulating intelligence to deceive the electorate and justify a predetermined decision to go to war.
Then, on May 6, 2003,
New York Times
columnist Nicholas Kristof wrote a column titled “Missing in Action: Truth.” It focused not only on the discredited claim that Iraq had tried to buy uranium in Africa, but leveled the far more serious accusation that the Bush administration had “souped up” intelligence in order to “deceive people at home and around the world.”
I’m told by a person involved in the Niger caper that more than a year ago the vice president’s office asked for an investigation of the uranium deal, so a former U.S. ambassador to Africa was dispatched to Niger. In February 2002, according to someone present at the meetings, that envoy reported to the CIA and State Department that the information was unequivocally wrong and that the documents had been forged.
 
Coming from a journalist of Kristof’s stature, with two Pulitzer Prizes, the column had an enormous impact, including on other journalists, and elevated the notion that intelligence had been deliberately manipulated or distorted. The column was also the first public mention of a former ambassador and his trip to Niger. But in the White House, Kristof’s column at first generated curiously little reaction, given the gravity of the charges. Vice President Cheney’s chief of staff, I. Lewis “Scooter” Libby, thought it was a “sleeper,” saying, “I noted it; I didn’t pay much attention to it; and then it sort of built momentum as it went along.”

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