MARTHA STEWART
John Marshall Mantel  /  AP
Martha Stewart arrives for her trial at U.S. District Court in New York on Wednesday.
updated 2/4/2004 7:51:30 PM ET 2004-02-05T00:51:30

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 in Mexico.

“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 described parts of the story that included him.

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

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.

The Food and Drug Administration issued a negative report about ImClone’s experimental cancer drug the day after the sale, sending the stock down 18 percent. Stewart saved about $50,000 by getting out when she did.

Waksal, a former jet-setting New York socialite, is serving a seven-year prison sentence after admitting he instructed his family to sell ImClone shares when he got advance word about the report.

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.

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

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 lawyers 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.

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.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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