Martha's Secretary Breaks Down on Stand

Martha Stewart's (search) secretary broke down in sobs on the witness stand Monday as she described thanking the homemaking mogul for a gift of plum pudding just before relaying a broker's prediction that ImClone Systems (IMCL stock would drop.

The judge overseeing the trial sent jurors home 15 minutes early when secretary Ann Armstrong could not continue her testimony.

Armstrong was answering questions from a prosecutor about messages she relayed when Stewart checked in on her way to a vacation in Mexico on Dec. 27, 2001. It was the first time they had spoken since Christmas.

"I thanked her for the plum pudding she sent home," Armstrong said through tears. Stewart appeared to take a deep breath, blowing her nose on a tissue and taking sips from a bottle of water.

Another of the messages Armstrong gave Stewart that day had been left by her stockbroker: "Peter Bacanovic (search) thinks ImClone is going to start trading downward."

The government claims Bacanovic was trying to get word to Stewart that ImClone founder Sam Waksal (search) was dumping his shares. Stewart and Bacanovic say they had a pre-existing deal to sell ImClone when it fell to $60 per share.

Prosecutors, trying to undercut that theory, introduced two message logs that showed Bacanovic sometimes called Stewart to tell her the exact ImClone stock price. But Armstrong said Bacanovic left no such information on Dec. 27.

Just hours later, Stewart called Bacanovic's assistant and sold her 3,928 shares in the company -- avoiding a steep drop in the stock price when the company announced negative news the next day.

Prosecutors called Armstrong to testify after the government's star witness -- former Merrill Lynch & Co. (MER) assistant Douglas Faneuil (search), who handled the ImClone sale -- finished his testimony after four days on the stand.

Faneuil has insisted that Bacanovic ordered him to tip Stewart about Waksal. He says he never knew of any pre-existing arrangement between Stewart and the broker to sell ImClone when it fell to $60.

On Monday, under questioning from Stewart lawyer Robert Morvillo, Faneuil said he did not believe at the time that he was doing anything wrong when he passed her the tip about the Waksal sale.

Faneuil also testified Stewart never encouraged him to lie.

Faneuil was asked by Morvillo whether he knew he was violating Merrill policy by relaying the tip. The company forbids its employees to give information about one client's account to another client.

But Faneuil said he only thought about the violation later, and he repeated that Stewart's broker at the time, Bacanovic, had ordered him to give Stewart the tip and encouraged him to lie about it later.

"I would say because Peter told me to do it, I did not think I was doing anything wrong," Faneuil said.

Faneuil, 28, was cross-examined by Morvillo for several hours.

On Dec. 27, 2001, Faneuil handled both Stewart's sale of ImClone and an earlier request by Waksal's accountant to transfer Waksal's shares into the account of his daughter, Aliza.

Faneuil has testified both events made him uneasy. But Morvillo, trying to damage the witness' credibility, questioned why he did not immediately alert Merrill officials that there might have been wrongdoing.

"Were you deliberately attempting to assist two of your customers in violating the insider-trading laws?" Morvillo asked.

"At the time I was attempting to be a client associate, take clients' orders, do what Peter told me to do," Faneuil answered. "I would say no, I was not deliberately attempting."

Stewart and Bacanovic are accused of repeatedly lying to investigators about why Stewart the shares. Stewart is also accused of deceiving investors in her own media company about the ImClone probe.

Faneuil initially supported the defendants' assertion of the $60 arrangement, then changed his version of events in June 2002 and agreed to cooperate with the government.