Friends of Faneuil to Testify in Martha Trial

The government will look to show the former broker's assistant told his pals about Stewart's stock sale.
By Gregg Greenberg ,

Updated from 2:09 p.m. EST

The prosecution will call at least two of Douglas Faneuil's friends to the witness stand before it rests its case against Martha Stewart on Thursday afternoon.

The friends of the former Merrill Lynch broker's assistant are expected to tell the jury that in January 2002, Faneuil told them the truth about the events surrounding Stewart's fateful 4,000-share sale of

ImClone Systems

(IMCL)

while he was simultaneously lying to government investigators at the behest of his boss, Peter Bacanovic.

The two friends have not been identified and are expected to be named sometime Wednesday.

Defense attorneys at the trial in federal court in Manhattan had been attempting to block this testimony on the grounds that Faneuil had reversed his story to curry favor with the government in order to lessen his own sentence.

Nevertheless, Judge Miriam Goldman Cedarbaum rejected the defense's motion on the grounds that Faneuil's statements were made well before he signed on as the government's star witness in June 2002.

"The government can show he told his friends that he had done something wrong, that he was told to do it, and he was worried," the judge said.

The prosecution alleges that just prior to her own well-timed ImClone divestiture, Stewart was tipped that company founder Sam Waksal and his family were hurriedly unloading their own stake in the biotech company.

Prosecutors say Stewart and Bacanovic then concocted a story of a previous arrangement to sell her shares when the price fell through $60, and lied to federal investigators who were checking on suspicious trades made that day.

Cedarbaum's ruling that Faneuil's friends will be permitted to corroborate his story might have been the best news all day for a prosecution that has seen its momentum slip away since Faneuil left the building last week.

Earlier in the day, Cedarbaum ruled that jurors will get to hear about phone calls between Stewart and Bacanovic in the weeks following Stewart's sale of ImClone stock in December 2001. However, Cedarbaum instructed the government that it would be limited in its use of the calls so as not to encourage speculation among jury members as to their content.

A few calls that seemed vital to the government's conspiracy case were ruled off limits to prosecutors because they are useless in divining motive and do not represent the kind of "overt act" that must be proven in a conspiracy, the judge decided.

The most notable phone call rejected by Cedarbaum took place on Feb. 4, 2001, at 7:09 a.m. The call was placed by Bacanovic to Stewart on the morning of the domestic diva's first meeting with the

Securities and Exchange Commission

.

"The uncommunicated state of mind of a conspirator is not an overt act," Cedarbaum said, adding that one call from Bacanovic to Stewart simply "shows he wanted to reach her."

Dialing Stewart's number "is not an act that furthered the conspiracy," the judge noted.

Cedarbaum also forbade prosecutors from trying to imply Stewart and Bacanovic were up to something illicit when they spoke in the weeks following her ImClone sale, which came days before a regulatory setback gutted the shares. Defense attorneys even were able to convince the judge to order revisions in a chart that mapped both phone calls and emails between the two.

Cedarbaum agreed with defense attorneys Jack Tigue and David Apfel, and asked Assistant U.S Attorney Karen Seymour to amend the chart painstakingly compiled by an FBI agent to assist the prosecution.

"I do not think you should sum up over the course of the trial," the judge said, drawing a distinction between the evidentiary phase of a trial and its conclusion, when lawyers try to convince jurors of their case. Cedarbaum instructed that all mentions of email messages be removed before copies were passed to jurors.

Cedarbaum also stressed to jurors that when prosecutors showed Stewart and Bacanovic spoke in the aftermath of the sale, it didn't prove nefarious motive.

"The mere fact that there was a phone call on a particular day is not relevant to showing the content of the call," the judge said.

FBI special agent Michael Ryan spent the day detailing the government's records of phone calls in slow-moving testimony. Ryan had sifted through millions of phone calls to find those connecting the dots and defendants in the case.

The prosecution said it intends to rest its case by Thursday afternoon if there are no serious delays. Between now and then it plans to call witnesses that include Morgan Stanley investment banker David Topfer, Bear Stearns analyst Kevin Gruneich and

Martha Stewart Living Omnimedia

(MSO)

executive Gregory Blatt.

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