Prosecutors turned up the heat on Martha Stewart Wednesday when a stockbrokers assistant admitted taking a payoff to keep silent about an alleged insider-stock trade by the home-decorating diva.
Douglas Faneuil, 27, pleaded guilty as part of a deal to testify against Stewart and others who might be charged in connection with sales of ImClone Systems Inc. shares last December.
He admitted to a misdemeanor charge of receiving money and other valuables "as consideration for not informing."
Faneuil worked at Merrill Lynch & Co., the Manhattan-based brokerage firm, for Stewarts broker, Peter Bacanovic. Immediately after the plea, the firm said that both Bacanovic and Faneuil had been fired.
"This public plea is designed to convince Martha Stewart to lay down her sword and admit that she traded on inside information," said Seth Taube, a former Securities and Exchange Commission lawyer who now is in private practice.
"The idea is, you flip Faneuil, then you flip Bacanovic, and then you get Stewart," Taube said. "She is clearly the top of the pyramid in this little triangle."
Stewart dumped nearly 4,000 shares of ImClone just before the stock price began to plunge on news that the Food and Drug Administration would not review its application for its highly touted cancer drug, Erbitux.
The FDAs decision meant that the drug, upon which the companys fortunes relied, was unlikely to gain approval anytime soon.
Court papers filed in Manhattan federal court did not identify the "tippee" who received the insider information.
Faneuils lawyer, Marvin Pickholz, was asked outside court if the "tippee" was Stewart, and answered: "If you guys read this information, and you cant fill in the blanks, youre in serious trouble."
Prosecutors are trying to build a criminal case against Stewart for allegedly receiving insider information. She and her friend, Samuel J. Waksal, ImClones founder and ex-CEO, shared Bacanovic stock-brokering services.
Faneuil admitted during his plea that he had withheld the truth from SEC investigators, as well as FBI agents, when first interviewed about the trading activity.
"I did not truthfully reveal everything I knew concerning the actions of my immediate supervisor ... and the true reasons for the tippees sale of ImClone stock," Faneuil said.
In exchange for stonewalling probers, Faneuil was offered an extra week of vacation and a free airline ticket, and was given an increase in his commission rate, court papers said.
His lawyer denied published reports stating the assistant had received Knicks basketball tickets in exchange for his silence.
Court papers say that on Dec. 27, Faneuils boss let the "tippee" know Waksal was trying to sell all of the ImClone stock he held at Merrill Lynch.
"The tippee then sold all of the tippees shares of ImClone stock, approximately 3,928 shares, yielding proceeds of approximately $228,000," the court papers said.
Waksal was indicted in August for allegedly telling family members to dump millions of dollars worth of ImClone stock before the bad news about Erbitux hit the markets.
He pleaded innocent to the charges.
Stewart, who has denied wrongdoing, has said she had a standing order to sell the ImClone shares if they fell below $60.
Faneuil initially gave investigators the same account, but later changed his story and said there had been no such order.
Allyn Magrino, a spokeswoman for Stewart, declined to comment on Faneuils plea. Bacanovics lawyer did not return a call seeking comment.
Mark Herr, a Merrill Lynch spokesman, said the firm "has cooperated fully with investigators and has conducted itself properly throughout."
Marc Powers, another attorney for Faneuil, said his client "voluntarily came forward" to tell authorities what he knew.
"Nine months ago, Doug found himself, by certain events, in a very difficult situation thrust upon him," Powers said. "He is a young man who had the guts and courage to come forward."
The misdemeanor charge carries a maximum penalty of a year in prison, but under the plea deal, Faneuil likely will get probation.
Shares of Martha Stewart Living Omnimedia Inc. were down 51 cents, or 7 percent, at $6.74 each on the New York Stock Exchange.Copyright © 2014, Los Angeles Times