Witness: Tip led Stewart to sell shares

NEW YORK -- 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 home fashion executive's trial.

Douglas Faneuil, a former assistant at Merrill Lynch & Co., said he passed along the tip to 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," Faneuil said he told Stewart, referring to ImClone founder Sam Waksal.

Faneuil said he quoted ImClone's stock price, and Stewart eventually declared: "I want to sell." 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. Stewart saved about $50,000 by getting out when she did.

Faneuil, 28, 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 a preexisting agreement to sell the stock when it fell to $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."

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 struck the $60 arrangement before the sale.Defense lawyers told US District Judge Miriam Goldman Cedarbaum they plan to question Faneuil on cross-examination about his repeated use of marijuana and Ecstasy. Without the jury present, Faneuil said in court that he had used both drugs while he was employed by Merrill Lynch but had never used them during the workday.

A heated exchange followed between Seymour, the lead prosecutor in the case, and Stewart's attorney, Robert Morvillo, on how much of the past drug use should be admissible before the jury.

Cedarbaum said she would allow limited questioning about Faneuil's drug use. Faneuil testified earlier that on Dec. 27, he took calls before 10 a.m. from Waksal's accountant and Waksal's two daughters -- all demanding that Faneuil sell their ImClone shares.

Bacanovic ordered him to "get Martha on the phone" when he learned of the selling, and she called Bacanovic's office that day just after 1:30 p.m.

Faneuil said he related the information about the Waksal selling, and that Stewart wondered aloud how she could be sure her own sale had been completed. Faneuil said he suggested he could send an e-mail to Stewart's assistant, but Stewart told him he could "absolutely not" discuss her personal business with her assistant.