Broker assistant strengthens case against Stewart

NEW YORK -- In the most damaging testimony yet against Martha Stewart, a former Merrill Lynch assistant said Wednesday that the homemaking mogul ordered all her ImClone Systems stock sold after she learned the company founder was dumping his own shares.

Douglas Faneuil, the government's star witness, said he passed the tip from broker Peter Bacanovic to Stewart when she called on Dec. 27, 2001, on her way to a vacation.

"Peter thought you might like to act on the information that Sam is selling all of his shares," Faneuil said he told Stewart, referring to ImClone founder Sam Waksal.

Later in the call, Faneuil said he quoted ImClone's stock price for Stewart, and she eventually declared: "I want to sell." Faneuil placed the sell order, netting about $228,000 for Stewart.

Stewart glanced back and forth at Faneuil and prosecutor Karen Patton Seymour while Faneuil testified, making notes on a legal pad. Bacanovic took notes as well, and appeared to scoff occasionally when Faneuil de-scribed parts of the story.

As cross-examination began Tuesday afternoon, Faneuil acknowledged that Bacanovic never "explicitly" directed him to lie about the transaction afterward.

Accused of lying

Faneuil's testimony is the centerpiece of the government's case against Stewart and Bacanovic, who are accused of repeatedly lying to investigators by insisting they had a pre-existing agreement to sell the stock when it fell to $60.

Faneuil, 28, also described a frantic effort by Bacanovic in the months after the sale to pressure him into supporting two separate cover stories. He said the broker offered him a week's vacation and a trip to Argentina in early 2002.

He said Bacanovic first told him the reason for the sale was to generate tax losses to offset capital-gains taxes, then claimed he and Stewart had struck the deal to sell when the stock hit $60.

Faneuil said Bacanovic told him: "Listen, I've spoken to Martha, I met with her, and 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 a true story."

Defense attorneys told U.S. District Judge Miriam Goldman Cedarbaum that they plan to question Faneuil about his repeated use of marijuana and the club drug Ecstasy.

Without the jury present, Faneuil said in court that he had taken both drugs while employed by Merrill Lynch but that he had never used them while at work.

A heated exchange followed between Seymour and Stewart's attorney, Robert Morvillo, on how much of the past drug use should be admissible before the jury.

Drug use a factor

Faneuil agreed in 2002 to cooperate with the government in its prosecution of Stewart and Bacanovic, and a routine clause in the agreement required him not to break the law.

Morvillo claims Faneuil broke that clause when he smoked marijuana on an April 2003 trip to Jamaica, and said the government should have "torn up" its agreement with Faneuil. Seymour aggressively disagreed.

Cedarbaum said she would allow limited questioning about Faneuil's drug use -- but not questions about his smoking marijuana during the Jamaica trip.

The call from Stewart to Faneuil came on a day when Faneuil had already handled requests from three members of the Waksal family to dump their ImClone shares.

He has testified Bacanovic ordered him to "get Martha on the phone" when he learned of the selling. Stewart called Bacanovic's office that day just after 1:30 p.m.

"Hi, this is Martha," Faneuil said the call began. "What's going on with Sam?"

Faneuil said he related the information about the Waksal selling, and he said Stewart wondered aloud how she could be sure that her own sale had been completed.

Faneuil said he suggested he could send an e-mail to Ann Armstrong, Stewart's assistant, but Stewart told him "absolutely not."

"Ms. Stewart started getting extremely upset," Faneuil said.

Stewart faces five counts in a federal indictment, carrying a potential prison term of 30 years. Bacanovic faces five counts carrying 25 years. Both would probably get lighter sentences under federal guidelines if convicted.