Broker's Assistant Faneuil Says He Aided Cover-Up

The government's star witness takes the stand, impugning his boss, Martha Stewart -- and himself.
By Gregg Greenberg ,

Douglas Faneuil, star witness in the government's case against Martha Stewart and her stockbroker, Peter Bacanovic, briefly took the witness stand late Tuesday but wasted little time in blasting the defendants -- and himself -- with expected but vivid testimony.

"I told one client about what another client was doing with his account and lied about it to cover up," said Faneuil, who served as Bacanovic's assistant at

Merrill Lynch

(MER)

.

The much-anticipated key witness said he passed on information that led Stewart to dump nearly 4,000 shares of

ImClone Systems

(IMCL)

before damaging news about its main cancer drug became public.

Prosecutors have alleged that Bacanovic ordered Faneuil to tip the former chief executive of

Martha Stewart Living

(MSO)

about heavy selling by company founder, Sam Waksal, and his daughter, both of whom were clients of Bacanovic. Waksal is now serving jail time after pleading guilty to passing inside information to family members.

Faneuil looked relaxed and even jovial at times as he finally took the stand late Tuesday. The young, former assistant broker energized a New York courtroom that seemed to be in danger of falling asleep amid hours of testimony that resembled a 101 course in brokerage terminology.

Faneuil ended his dramatic testimony by recalling his telephone conversation with Bacanovic on the morning of Dec. 27, 2001, regarding the Waksal sales of stock. Bacanovic was out of the office on vacation in Florida at the time. According to Faneuil, Bacanovic specifically ordered him to inform Stewart about Waksal's actions.

"Peter called me back and said, 'Listen, Martha is going to call you. You have to tell her what's going on'," said Faneuil.

"Can I tell her about Sam (Waksal)? Am I allowed to?" replied Faneuil.

Fanueil said Bacanovic answered, "Of course you can. You must. That's the whole point."

Before this conversation, Faneuil said he spent most of his morning scrambling to sell ImClone shares for Sam Waksal and his daughters Eliza Waksal and Alana Waksal Posner.

Faneuil said he arrived at Merrill's Rockefeller Center branch that morning at 9 a.m. As soon as he took his seat, he said he received a stream of calls and faxes from Sam Waksal's financial adviser, Alan Goldberg, and daughters Eliza and Alana.

Regarding Eliza Waksal's tone, Faneuil said, "She was tired, like she was woken up in the middle of the night."

According to Faneuil, Alana Waksal requested that he sell all her ImClone holdings, approximately 40,000 shares. Faneuil said he suggested "a limit order" instead to try and improve the trade's execution, but she said she wanted to sell "at the market."

A limit order means to sell shares at or above a specified price. A market order is to sell at the best price currently available. In the courtroom Tuesday, observers had spent much of the morning hearing about this distinction. Until Faneuil's appearance at 3:25 p.m., testimony had centered on Merrill's Rockefeller Center branch administrative officer, Judy Monaghan. Most of the questions asked of Monaghan revolved around her defining various trading terms that eventually arose during Faneuil's testimony.

During initial questioning, Faneuil said he had a license to execute trades for Bacanovic's clients, but did not have the Series 63 license required in certain states to become a stockbroker. He eventually received his Series 63 in 2002. Faneuil also admitted to lying on his resume, saying he had a 3.5 grade-point average from his college stints at Bennington and Vassar, while really graduating with a 3.44.

Faneuil went on to describe Bacanovic as the "best boss I ever had." And although he didn't consider himself a close friend of Bacanovic, he said, "We did things socially."

Faneuil said he participated in a three-way call to Stewart's assistant, Anne Armstrong, with Bacanovic prior to receiving the instruction from Bacanovic to tell Stewart about the Waksal sales.

"Oh my God, get Martha on the phone," Bacanovic told Faneuil before the conference call was arranged, Faneuil said. "He instructed me to call her with him on the line."

After reaching Armstrong instead of Stewart herself, Faneuil said he listened along and did not speak.

"He would do the talking," Faneuil said. "He did all the talking. I remember hearing that Martha was on the plane."

After leaving a message with Armstrong for Stewart to call Merrill Lynch, Bacanovic called Faneuil and instructed him to tell Stewart about the Waksal sales, Faneuil said.

Though Faneuil was on the stand for only about an hour and a half on Tuesday, the prosecutor's questioning appeared to be the start of a long stretch for Faneuil in the witness box.

Prosecutor Karen Seymour had planned to put the 28-year-old former broker's assistant on the stand last week. But his testimony was postponed when defense lawyers received what they considered material evidence about his version of events, which they believed might impugn his credibility. U.S. District Judge Miriam Goldman Cedarbaum moved the testimony to Tuesday without further elaboration in a ruling.

Stewart and Bacanovic are charged with obstruction of justice and other crimes for allegedly concocting a story to explain Stewart's ImClone divestiture. The sale happened the day before news that the Food and Drug Administration had rejected an application for Erbitux, the biotech company's most promising drug in development.

As a key government witness, Seymour will have Faneuil discuss every aspect of the morning and early afternoon of Dec. 27, 2001, when Stewart sold her shares, and all of his subsequent conversations with Bacnovic and other Merrill officials about the transaction.

He will then face aggressive cross-examination by Robert Morvillo, Stewart's attorney, and Richard Strassberg, who is leading Bacanovic's defense.

The cross-examination is expected to be particularly vigorous because Faneuil already has pleaded guilty to lying to federal investigators. In opening arguments last week, he was described as a person with an incentive to lie, because he has not been sentenced for that charge.

Seymour last week attempted to blunt the defense strategy in advance, calling Faneuil "an admitted criminal" who nonetheless had followed his boss' orders in committing the alleged cover-up.

On Monday, former Waksal secretary Emily Perret testified that Stewart placed a frantic telephone call to her boss the afternoon of Dec. 27, 2001, to find out why he and his family were bailing out of the shares. "I remember speaking with Martha and she said to 'get Sam,' or 'where is Sam?'" Perret said. "'This is Martha. Something's going on with ImClone and I want to know what it is. Go find him.'"

Perret also recounted Waksal's requests to alter phone messages and change letters and other documents before the company was investigated.

"I started deleting messages," she said. But as government lawyers and investigators inspected the offices, "I started to feel like by doing something that my boss asked me to do, I felt like it wasn't the right thing for me to do," she testified.

Perret received immunity from prosecution in exchange for her testimony in Waksal's case, and in the subsequent case against Stewart and Bacanovic.

Another witness, Brian Schimpfhauser, a surveillance analyst in Merrill's compliance department, recounted how on Dec. 31, 2001, he spotted suspicious ImClone trades by Waksal's daughters, Alana and Eliza, followed by trades by Stewart.

"I noticed the last name of Waksal ... and immediately some bells and whistles started going off in my head," Schimpfhauser told the jury. "There's some potential problems there."

Stewart, who sat flanked by lawyers at the defense table, was more active than previous days, scrutinizing documents as they were projected on a screen for jurors, and even chatting briefly with Bacanovic during a break.

Schimpfhauser also noticed Stewart's trades, and trading documents identified her as a "key client" of Merrill's, someone with more than $250,000 invested with the firm.

Prosecutors asked about the firm's initial response to the suspicious trades, which included meetings with Bacanovic, in-house counsel David Marcus, Rockefeller Center branch administrative officer Judy Monaghan and Schimpfhauser's immediate supervisor, Steven Snyder.

Prosecutor Seymour asked if Snyder, who may be called to testify, had assumed an emotional tone, shouting that "heads will roll" and "someone is going down for this."

Schimpfhauser, who had worked as a full-time surveillance analyst for only six weeks before the meetings in early January 2003, said he did not take detailed notes and could not remember. He added that his former boss' personality had a few rough edges.

"A lot of people view him as almost obnoxious," Schimpfhauser said. "He was very intimidating from the first day I met him. But that's his personality. He's a wonderful guy."

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