Bacanovic Trade Story Differs With Stewart Aide's

The Merrill broker told SEC lawyers he never said he thought the shares would fall.
By Gregg Greenberg ,

Updated from 1:18 p.m. EST

Former

Merrill Lynch

broker Peter Bacanovic gave government lawyers an account of Martha Stewart's Dec. 27, 2001, sale of

ImClone

stock that is at odds with testimony given by Stewart's assistant, a tape played in court revealed.

Prosecutors played a lengthy tape of the Feb. 13, 2002, interview with

Securities and Exchange Commission

investigators to jurors Wednesday. Stewart and Bacanovic are on trial for obstruction of justice, in federal court in New York.

In the tape, government lawyers assiduously plumbed Bacanovic's memory of the events surrounding the stock sale, which came just days before ImClone's price was ravaged by a Food and Drug Administration setback on an ImClone drug.

Much of the tape involved Bacanovic's recollection of the day Stewart made her fortuitous divestiture -- a trade for which prosecutors allege she and Bacanovic later concocted a story to explain away.

Bacanovic reviewed for his interviewers numerous calls made between his assistant, Douglas Faneuil, and himself with Stewart, as well as family members of Sam Waksal, the ImClone founder whose frantic efforts to sell his stake ignited the controversy.

After he learned from Faneuil that the Waksals were dumping their shares of ImClone, Bacanovic told his assistant that he wanted to call Stewart to "apprise her of the price."

Unable to reach Stewart, who was en route to Mexico, the pair left a message with her assistant, Anne Armstrong, to call their office and then "we just gave her the price of the stock."

A lawyer asked Bacanovic if he "specifically told Annie that ImClone stock was dropping," to which Bacanovic replied: "No."

That would appear to contradict testimony given Tuesday by Armstrong herself, in which she quoted a message in Stewart's phone message log from Dec. 27, 2001, saying "Peter Bacanovic thinks ImClone is going to start trading downward. "

It was that phone log, Armstrong testified, that was eventually changed and changed back by Stewart, and would become a central piece of evidence in the government's case that she and Bacanovic lied about why she sold her shares.

The tape contained few other bombshells, however, and consisted mainly of Bacanovic's now well-known story that he struck an informal agreement with Stewart to sell ImClone when it fell below $60.

Of some interest was Bacanovic's description of why Stewart still held the 4,000-share ImClone slug after divesting as many as 50,000 shares held in a company pension account at a huge profit months before.

"It came to me as a great surprise, having felt I had liquidated all ImClone shares from her accounts at that time, that the stock was still there

in Stewart's personal account.

"She wanted to hold the stock and I challenged that by saying, 'The stock has been clearly declining, why would you hold it? Why are you holding this considering we sold 50,000 shares or 40,000 shares two months ago

in the pension account'. And we determined at that point if, in fact, it fell much further we would sell it."

So why did she own the shares?

"Many of my clients invest in certain companies out of loyalty and friendship and they like to say that they own each other's stock," Bacanovic said. "And I think that, essentially, that relatively small position, versus what she originally had, was a token sum that she had in her account, really primarily just basically because she thought she was investing in someone she knew." (Stewart and Waksal had been friends socially.)

The pair agreed on Dec. 20, 2001, to sell the stock if it fell below $60, but Stewart did not place a limit order because "she does not like doing that." Instead, Bacanovic told his client, "We'll watch the stock for you."

Bacanovic also told the government's lawyers that ImClone stock "has always been a stress to me, primarily because of my relationship with the Waksals."

The tape also revealed that Bacanovic's total compensation in salary and commissions was $540,000 in 2001, and that the figure dropped to $350,000 a year later due to the bear market.

After playing the audiotape from the Feb. 13, 2002, meeting, the government called FBI agent Catherine Farmer to the stand. Farmer is set to continue her testimony on Friday.

Earlier in Wednesday's session, Stewart's defense team tried and failed to get a mistrial, but did point out a lack of rigor in the initial investigation by an SEC lawyer who examined suspicious trading in ImClone Systems at the end of 2001.

Helene Glotzer, the SEC attorney who began investigating suspicious trades in the biotech company after being contacted by Merrill Lynch's compliance department, erred in not taking notes detailing who sold whose shares and when, according to defense attorneys Richard Strassberg and Robert Morvillo.

Morvillo later tried to show that Glotzer's testimony was unreliable because Glotzer is involved in the civil insider-trading case against Stewart.

But, she admitted, she didn't take notes on those discussions as she worked on an investigation for the SEC. Stewart faces civil charges of insider trading in a separate SEC complaint.

Strassberg, Bacanovic's lead attorney, then implied it was Stewart's fame as a lifestyle maven and head of

Martha Stewart Omnimedia

(MSO)

that led to criminal charges being filed.

"Celebrities would have no bearing on referring it to the U.S. attorney's office?" the lawyer asked.

"No," Glotzer said.

Under further cross-examination from Morvillo, the lead attorney in Stewart's defense, Glotzer said her Jan. 19 conversation with Merrill Lynch attorney David Marcus wasn't focused primarily on Stewart.

Glotzer said Marcus told her Stewart's ImClone sale was one of 19 stocks she sold in the last week of December.

"'She knew Sam Waksal and this had nothing to do with Sam Waksal's trade,'" Glotzer said Marcus told her.

"I was more concerned with Sam Waksal and his attempt to transfer shares," Glotzer said in court.

Before testimony began, Morvillo said the government was trying to convince the jury that insider trading was a motive for Stewart's actions, without charging her with that crime. The defense has tried to bolster its case by introducing motions saying the government can't prove Stewart had inside information when she made the sale.

U.S. District Judge Miriam Goldman Cedarbaum denied the motion. She said the defense team didn't need to fend off charges that Assistant U.S. Attorney Karen Seymour wasn't trying to prove.

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