Friend: Stewart Knew Waksal Was Dumping Stock

Three days after dumping her ImClone Systems (IMCL) stock, Martha Stewart (search) confided to a longtime friend that she knew ImClone CEO Sam Waksal (search) had tried to sell his own shares, the friend testified Thursday.

The testimony by Mariana Pasternak (search) was perhaps the most damaging yet against the homemaking mogul, who told investigators three months later she had no memory of being tipped about Waksal.

Pasternak, a friend of Stewart for more than 20 years, said she had the conversation with Stewart on Dec. 30, 2001, on a terrace at a Mexican resort where they were vacationing.

Pasternak said Stewart recalled Waksal "was selling or trying to sell his stock, that his daughter was selling or trying to sell his stock."

She said Stewart added: "Isn't it nice to have brokers who tell you those things?"

Stewart and broker Peter Bacanovic (search) are accused of lying to investigators about why Stewart dumped her 3,928 shares of ImClone — just before the stock sank on a negative government decision about an ImClone cancer drug.

While Stewart is not charged with knowing about the drug review, she told investigators in 2002 she did not recall being told anything about Waksal trying to sell.

Waksal, a friend of both Stewart and Pasternak, is serving a seven-year prison sentence for insider trading. He and his family frantically sold, or tried to sell, their shares ahead of the drug announcement.

Stewart and Bacanovic claim they had made a deal earlier in December 2001 to dump Stewart's ImClone shares if the stock fell below $60. Prosecutors say that was a cover story.

Pasternak, a real estate agent who like Stewart lives in Westport, Conn., said they had been friends for more than 20 years, spoke by phone every day and had traveled together to Peru and the Galapagos Islands.

Pasternak was flying on a private plane with Stewart on the day Stewart sold her stock. Pasternak testified she recalled Stewart had "a raised tone of voice" on the telephone at a refueling stop in Texas.

It was on a call from the refueling stop that Stewart sold her stock by phone.

Prosecutors, who plan to rest their case Friday, have amassed a damaging lineup of testimony against Stewart and Bacanovic.

Douglas Faneuil, a young former Merrill Lynch & Co. assistant, has testified Bacanovic ordered him on Dec. 27, 2001, to alert Stewart that the Waksals were trying to sell — then pressured him to cover it up.

Ann Armstrong, a personal assistant to Stewart, testified Stewart herself altered a computer log of a message Bacanovic left on Dec. 27, then quickly ordered her to change it back.

Earlier Thursday, an ink expert testified that a notation of "(at)60" on a worksheet Bacanovic used to track Stewart's portfolio had been made in a different ink than other marks on the sheet.

Larry Stewart of the Secret Service said infrared and ultraviolet light tests had confirmed differences between the "(at)60" entry and other marks.

"The '(at)60' entry is a different ink than the remaining entries on the document," the scientist said.

The worksheet, among the most critical pieces of government evidence in the trial, is a summary of gains and losses in 36 stocks Martha Stewart owned in late 2001 at Merrill Lynch & Co (MER).

Bacanovic made circles, check marks and other notations in blue ink on the document. The "(at)60" mark, also in blue ink, is underlined and appears next to an entry for Stewart's ImClone shares.

Under cross-examination, the ink expert said it was impossible to tell how many pens had been used to mark on the document. Bacanovic's team contends he simply used different pens in his work.

Stewart is charged with five criminal counts that carry a maximum prison term of 30 years. Bacanovic is charged with five counts carrying 25 years. Federal guidelines routinely reduce sentences to far less than the maximum.

Securities fraud is among the charges against Stewart. She's accused of misleading investors in her own company, Martha Stewart Living Omnimedia (MSO), by claiming in 2002 that she was innocent and telling the public about the $60 agreement.