Faneuil Says Martha Stewart Ordered Sale of ImClone Shares

In the most damaging testimony yet, the government's star witness against Martha Stewart (search) said Wednesday that Stewart told him to sell all her ImClone Systems stock after he advised her that the company founder was trying to dump his own shares.

Douglas Faneuil (search), a former broker's assistant at Merrill Lynch (MER), was the staffer who spoke to Stewart by telephone on Dec. 27, 2001 when she sold nearly nearly 4,000 shares of ImClone Systems Inc. (IMCL) stock.

Faneuil said he told her that ImClone founder Sam Waksal (search) was trying to sell all his shares of the stock -- and she ordered him to do the same.

"Hi, this is Martha," he quoted Stewart as saying at the beginning of the conversation. Faneuil said he advised her that she "might want to act on the information that Sam's selling all of his shares."

"All of his shares?" Stewart replied, according to Faneuil.

"What he does have here, he's trying to sell," Faneuil testified that he answered. According to Faneuil, Stewart then told him to sell off all her shares at market price -- contradicting her story that there was a standing "stop loss order" to sell the stock if it fell to $60 a share.

Faneuil said Stewart was "extraordinarily upset" and declared, "I want to sell."

Prosecutors charge that Stewart and Peter Bacanovic (search), Faneuil's former boss at Merrill, lied to investigators to hide questionable details about the stock trade, including whether Stewart received the inside trading tip.

Stewart faces five counts in a federal indictment, carrying a potential prison term of 30 years. Bacanovic faces five counts carrying 25 years. Both would probably get lighter sentences under federal guidelines if convicted.

Stewart glanced back and forth at Faneuil and prosecutor Karen Patton Seymour while Faneuil testified, making notes on a legal pad. Bacanovic took notes as well, and appeared to scoff occasionally when Faneuil described parts of the story that included him.

As cross-examination began Tuesday afternoon, Faneuil acknowledged that Bacanovic never "explicitly" directed him to lie about the transaction afterward.

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 a pre-existing agreement to sell the stock when it fell to $60.

The Food and Drug Administration issued a negative report about ImClone's experimental cancer drug the day after the sale, sending the stock down 18 percent. Stewart saved about $50,000 by getting out when she did.

Waksal, a former jet-setting New York socialite, is serving a seven-year prison sentence after admitting he instructed his family to sell ImClone shares when he got advance word about the report.

Faneuil, 28, also 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 struck the deal to sell when the stock hit $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."

Meanwhile, lawyers for Bacanovic and Stewart eagerly await their chance to cross-examine Faneuil, about his repeated use of marijuana and the club drug Ecstasy, hoping they can punch holes in his credibility by painting him as a shady character and admitted liar.

Without the jury present, Faneuil said in court that he had taken both drugs while employed by Merrill Lynch but that he had never used them while at work.

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

Faneuil agreed in 2002 to cooperate with the government in its prosecution of Stewart and Bacanovic, and a routine clause in the agreement required him not to break the law.

Morvillo claims Faneuil broke that clause when he smoked marijuana on an April 2003 trip to Jamaica, and said the government should have "torn up" its agreement with Faneuil. Seymour aggressively disagreed.

Cedarbaum said she would allow limited questioning about Faneuil's drug use -- but not questions about his smoking marijuana during the Jamaica trip.

Faneuil had initially supported Bacanovic and Stewart's story, but changed his story in a 2002 plea deal with prosecutors.

Reuters and the Associated Press contributed to this report.