- The Washington Times - Wednesday, February 4, 2004

NEW YORK (AP) — An “extraordinarily upset” Martha Stewart ordered all her ImClone Systems stock sold after she learned the company founder was dumping his own shares, the prosecution’s star witness testified yesterday at the homemaking mogul’s trial.

Douglas Faneuil, a former assistant at Merrill Lynch & Co., said he passed along the tip to Mrs. Stewart on orders from her broker Peter Bacanovic when she called on Dec. 27, 2001.

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

Mr. Faneuil said he quoted ImClone’s stock price, and Mrs. Stewart eventually said: “I want to sell.” Mr. Faneuil placed the sell order, netting her about $228,000.

The Food and Drug Administration issued a negative report the next day about ImClone’s experimental cancer drug, sending the stock down 18 percent. Mrs. Stewart saved about $50,000 by getting out when she did. Mr. Waksal is serving a seven-year prison sentence for securities fraud and other charges.

Mr. Faneuil, 28, described a frantic effort by Mr. 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 Mr. Bacanovic first told him the reason for the sale was to generate tax losses to offset capital-gains taxes, then claimed he and Mrs. Stewart had a pre-existing agreement to sell the stock when it fell to $60.

But Mr. Faneuil said even Mrs. Stewart’s financial assistant questioned the tax-loss justification because the stock was sold at a gain for Mrs. Stewart. She had sold many other stocks earlier in December at a loss for tax purposes.

In January 2002, as the investigation into Mrs. Stewart’s stock sale was growing, Mr. Faneuil described the explanation that an animated Mr. Bacanovic gave him in a discussion in Mr. Bacanovic’s office.

Mr. Faneuil said Mr. 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.”

Mrs. Stewart glanced back and forth at Mr. Faneuil and prosecutor Karen Patton Seymour while Mr. Faneuil testified, making notes on a legal pad.

Mr. Bacanovic made notes as well, and appeared to scoff occasionally when Mr. Faneuil described parts of the story that included him.

Mr. Faneuil’s testimony is the centerpiece of the government’s case against Mrs. Stewart and Mr. Bacanovic, who are accused of repeatedly lying to investigators by insisting they had smade the $60 arrangement before the sale.

Mrs. Stewart faces five counts carrying a potential prison term of 30 years. Mr. Bacanovic faces five counts carrying 25 years. Both would likely get lighter sentences if convicted.

Mr. Faneuil originally supported Mrs. Stewart and Mr. Bacanovic’s version, but struck a deal with the government in June 2002 to plead guilty to a misdemeanor and cooperate with prosecutors.

Asked yesterday to explain why he changed his story, Mr. Faneuil said: “There came a point in time where I just couldn’t continue to lie. I felt that the coverup was part of my daily existence, and I just couldn’t take it anymore.”

As cross-examination began, Mr. Faneuil admitted he has used cocaine, marijuana and the party drugs Ecstasy and ketamine, sometimes called Special K.

But he described the cocaine and ketamine uses as extremely limited, and said he had never been under the influence of any drugs during the workday at Merrill Lynch.

He also acknowledged that Mr. Bacanovic never “explicitly” directed him to lie.

David Apfel, an attorney for Mr. Bacanovic, asked questions intended to show Mr. Faneuil was willing to tell the government whatever it wanted in exchange for not being prosecuted.

But when Mr. Apfel asked Mr. Faneuil whether he knew it was a violation of Merrill Lynch policy to pass information about Mr. Waksal’s account to another client, he implicated Mr. Bacanovic.

“Peter told me it was something I should do,” Mr. Faneuil answered. “I never dreamed that he’d be telling me to commit a crime.”

A routine clause in Mr. Faneuil’s 2002 cooperation agreement requires him not to break the law.

Mrs. Stewart’s attorney, Robert Morvillo, contends Mr. 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 Mr. Faneuil.

But the judge did not allow defense lawyers to ask Mr. Faneuil about the trip, saying such a line of questioning amounted to “an attack on the motive of the government in presenting this case.”

Mr. Faneuil is to return for more cross-examination today.

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