Witness: Martha sold stock after I tipped her off. Former broker's assistant Douglas Faneuil testifies that he illegally fed Stewart inside information, on his boss' orders

By Gary Susman
Updated February 05, 2004 at 05:00 AM EST

The government launched its strongest legal assault against Martha Stewart and her Merrill Lynch broker Peter Bacanovic on Wednesday with the testimony of Bacanovic’s former assistant, Douglas Faneuil, who testified that he illegally tipped off Stewart with inside information, at Bacanovic’s orders, that led to her controversial sale of ImClone stock on Dec. 27, 2001.

It was Faneuil’s second day on the stand; on Tuesday, he had testified that, when he told Bacanovic that morning that ImClone CEO Sam Waksal and his family were dumping their shares of the company held in Merrill Lynch brokerage accounts, Bacanovic replied: ”Oh my God, you have to get Martha on the phone.” He said that Bacanovic later told him, ”You have to tell her what’s going on.” According to the New York Times, Faneuil testified on Wednesday that Stewart called him that day and said, ”What’s going on with Sam?” He says he replied: ”We have no news about the company, but we thought you might like to act on the information that Sam is selling all his shares.” He says he told her the stock was trading at $58.4325 a share, and that she told him, ”I want to sell all of my shares.” Faneuil executed the trade that day, selling Stewart’s nearly 4,000 shares, one day before the stock price plunged on news that the government had rejected ImClone’s new cancer drug.

Within days, both Faneuil and Bacanovic were being questioned about the trade by higher-ups at Merrill, then by officials from the Securities and Exchange Commission. Faneuil testified Wednesday that Bacanovic ordered him to stand behind a series of false cover stories to explain the trade. First, he said, Bacanovic told him to cite the trade as tax-loss selling, an implausible excuse since Stewart earned capital gains on the sale. Then, he said, Bacanovic told him to say that there had long been a stop-loss order in place to sell Stewart’s shares if the stock price dipped below $60, an explanation that Bacanovic and Stewart maintain to this day. But Faneuil said that Bacanovic’s post-sale remarks about a stop-loss order was ”the first time ever” that such an order had been mentioned.

The defense questioned Faneuil’s credibility, noting that he’d agreed to testify in return for a modest misdemeanor sentence, and asking him about his prior drug use. Faneuil admitted that he’d taken ecstasy and smoked pot once a month during his tenure at Merrill Lynch but never during business hours, and that he’d informed the FBI of his drug use when investigators were vetting him as a potential witness.