Aide Says Stewart Sold Stock on Tip

Martha Stewart sold her stock in ImClone Systems Inc. after her broker’s assistant told her the company founder was trying to dump his shares, the assistant said Wednesday in the first testimony directly implicating the lifestyles mogul.

Douglas Faneuil, 28, then an aide to Stewart’s Merrill Lynch & Co. stockbroker, Peter Bacanovic, recounted the two-minute phone call on Dec. 27, 2001, that is at the heart of the federal fraud and obstruction-of-justice case against Stewart and Bacanovic.

Later, in cross-examination, the defense hammered away at the star witness’ credibility, eliciting admissions about his drug use and his initial lies to federal investigators.

Under examination by lead prosecutor Karen Patton Seymour, Faneuil said that when Stewart reached him Dec. 27, she said, “Hi. This is Martha. What’s going on with Sam?”

Sam was Stewart’s friend Samuel D. Waksal, then head of ImClone. As Faneuil testified Tuesday, Waksal’s two daughters and his accountant all had called that morning anxious to sell the millions of dollars’ worth of ImClone shares they held at Merrill Lynch. A day later came an adverse regulatory ruling that caused the company’s shares to plunge.

Faneuil told Stewart there was no news out on ImClone, “but Peter thought you might like to act on the information that Sam Waksal was trying to sell all of his shares.”

Stewart asked for the price of ImClone shares.

“So I gave her a quote,” Faneuil testified. “She said, ‘I want to sell all my shares.’ ”

When Faneuil offered to send an e-mail confirmation to Stewart’s office assistant, he said Stewart “got extremely upset with me for even suggesting it.” She demanded that he send the confirmation to her personal e-mail address, Faneuil said.

Lanky and wearing a gray-green suit and light shirt, Faneuil sometimes spoke straight to the jury of eight women and four men, especially when explaining a technical point about investments. On cross-examination later in the day, Faneuil acknowledged that prosecutors had extensively prepared him for his time on the stand.

Stewart, 62, in a black pantsuit, occasionally took notes as Faneuil testified, but her grim expression -- one of her fans has called it “her game face” -- did not change. Bacanovic, 41, was also tight-faced.

Faneuil recounted what he characterized as Bacanovic’s repeated efforts to get him to adopt “cover stories” to explain Stewart’s ImClone trade. First, the broker insisted it was for tax-planning purposes, then he said it stemmed from a prior agreement by Stewart and Bacanovic to sell when the price dropped below $60 a share, Faneuil testified.

About four weeks after the trade, Faneuil said Bacanovic called him into his office and said: “Listen, I’ve spoken to Martha. I’ve met with her. And everyone’s telling the same story. 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.”

The government contends that Stewart and Bacanovic concocted the story about the prior agreement to cover up an illegal insider tip.

Faneuil admitted that he lied to government investigators the first two times he was interviewed about the Stewart trade, but said he decided in June 2002 to confess after the pressure of months of lying wore him down.

The defense contends that Faneuil is lying now, trying to avoid prison for his own misdeeds.

When cross-examination began in late afternoon, Bacanovic’s lawyer, David J. Apfel, got Faneuil to acknowledge that Bacanovic never explicitly told him to lie.

Faneuil admitted to occasionally using the drugs Ecstasy and marijuana during the year he was employed by Merrill Lynch. Earlier, without the jury present, Faneuil said he also had experimented with cocaine and ketamine, or “Special K,” a club drug which has legitimate uses as a medical anesthetic and tranquilizer.