Broker's Assistant to Provide Key Testimony Against Martha Stewart

NEW YORK – The star witness against Martha Stewart (search) is expected to testify as soon as Thursday that his stock broker supervisor ordered him to pass a secret trading tip to the lifestyle trendsetter.

Douglas Faneuil's (search ) testimony, postponed because Wednesday's proceedings were canceled by a snow storm, could provide prosecutors with some of the most potent evidence in Stewart's obstruction of justice trial. Namely, that she sold nearly 4,000 shares of ImClone Systems Inc. (IMCL) Dec. 27, 2001, after receiving illegal insider information.

The clean cut, 28-year-old should know, prosecutors say. Faneuil, a broker's assistant at Merrill Lynch was the staffer who spoke to Stewart by telephone that day. He is expected to testify that he was ordered to tell Stewart that ImClone founder Samuel Waksal (search ) was dumping his shares in the company.

• Superseding Indictment (U.S. v. Stewart and Bacanovic) (pdf)

That testimony would contradict both Stewart and Peter Bacanovic (search ), his former boss and the co-defendant in the highly publicized trial. Both defendants claim Stewart never received a tip, but rather sold the stock because they had reached an agreement months earlier to unload it when it fell to about $60 a share.

Stewart is not charged with insider trading, but Faneuil's testimony could bolster the government's allegations she and Bacanovic lied to securities investigators to hide the suspicious stock trade.

But defense lawyers will attack Faneuil's credibility, saying he is the one who is an admitted liar and who cut a plea deal to save his own skin.

According to the prosecutor's opening statement Tuesday, Stewart and Bacanovic were vacationing separately in late December 2001 when Waksal started selling his ImClone shares because he knew the government was about to reject an application for a new cancer-fighting drug.

Waksal's large sell orders were placed through Faneuil, who was covering for his vacationing boss. Concerned about the size of the trades, Faneuil called Bacanovic and the broker told him to expect a call from Stewart. Faneuil is expected to testify that Bacanovic ordered him to inform her of the Waksal sale.

Prosecutor Karen Patton Seymor said that, when Faneuil questioned whether it was "okay" to do that, Bacanovic answered: "You have to. You must."

She said Faneuil followed his orders.

"He told Martha Stewart that the Waksals were trying to sell all their shares," she added.

When investigators started looking at the questionable sale over the following weeks, Bacanovic told Faneuil that Stewart's trade was for tax purposes, the prosecutor said.

"He understood what Peter Bacanovic was telling him, if anyone asked about the trade," she said. "He understood he better keep his mouth shut about the tip."

And Faneuil did, until he suddenly changed his story in June 2002 and told investigators that he had, in fact, informed Stewart that Waksal was selling his stock. Several months later Faneuil pleaded guilty to a misdemeanor charge and agreed to cooperate with prosecutors.

Merrill fired him in October 2002.

Stewart and Bacanovic's attorneys make no secret of plans to attack that agreement, portraying the witness during their opening statements as star-struck and naive, a liar out "to save himself."

"We're going to encourage you to scrutinize the testimony of Douglas Faneuil," Richard Strassberg, the lead attorney for Bacanovic told jurors in his opening statement.

"He has a free pass ... there is substantial bias in what he'll be saying."