Martha Stewart witness relents

Her broker's aide is now likely to testify against her

He had backed her alibi

His plea deal is key step in insider trading case

October 03, 2002|By NEW YORK TIMES NEWS SERVICE

NEW YORK - The assistant to Martha Stewart's stockbroker pleaded guilty yesterday to concealing the reason behind the sale of Stewart's shares of ImClone Systems.

He said he had done so in exchange for money, an extra week of vacation and a free plane ticket from the stockbroker.

Douglas Faneuil, 27, who entered his plea in a Manhattan federal courtroom, now says that Stewart sold her stock after learning that Samuel D. Waksal, ImClone's founder and then chief executive, was trying to dump thousands of his shares.

The source of Stewart's information, according to documents filed as part of Faneuil's plea, was the Merrill Lynch & Co. Inc. stockbroker, Peter E. Bacanovic.

Faneuil and Bacanovic initially had told investigators looking into the trading of ImClone shares that there was an existing agreement to sell the shares if the price slipped below $60 a share. Faneuil later admitted the explanation had been concocted.

Faneuil's description of the sale, the most detailed explanation yet offered, appears to lay the groundwork for a variety of charges against Stewart and her broker, including insider trading, perjury and obstruction of justice.

Michael Schachter, the federal prosecutor in the case, said in court that the government had evidence that backed up "everything that Faneuil has said." The evidence includes testimony from other people, phone records, e-mail messages and brokerage records, he added.

Expected to testify

As part of his plea agreement, Faneuil is expected to testify against others in the investigation.

Faneuil, who seemed steady and calm during his appearance before Magistrate Judge Kevin N. Fox to enter his guilty plea, had been in the Merrill Lynch office near Rockefeller Center that morning when the sell orders from Waksal and his daughter came in.

Bacanovic was on vacation in Miami, and Stewart was en route from Connecticut to her own vacation at a Mexican beach resort.

When her plane touched down in Texas to refuel, Stewart used her cell phone to call her office, investigators have said, where someone connected her to her broker's office.

Two minutes after she finished that call, her ImClone sale was completed. At the same time, she called Waksal and left a message asking what was going on with ImClone.

Faneuil's account undercuts Stewart's explanation of her Dec. 27 sale of nearly 4,000 ImClone shares. Stewart has said that she and Bacanovic agreed weeks earlier to sell if the share price fell below $60.

A spokeswoman for Stewart had no comment yesterday.

Both Bacanovic and Faneuil, who were suspended with pay by Merrill in June after the firm could find no record of an agreement with Stewart, were fired yesterday.

Faneuil was terminated because of his guilty plea, a Merrill spokesman said, and Bacanovic lost his job because he had refused to cooperate with federal investigators in the case.

Bacanovic's lawyer, Richard Strassberg, issued a statement expressing disappointment with Merrill Lynch's decision to fire the broker. Strassberg remains confident his client will be vindicated, his statement said.

Member of NYSE board

Stewart, the chairman and chief executive of Martha Stewart Living Omnimedia, also is a director of the New York Stock Exchange. Her company's share price, which has dropped by more than 60 percent since June, closed down 45 cents yesterday at $6.80.

Faneuil made no statement after leaving the courtroom. His lawyers pointed out that he had come forward voluntarily to change his story, first at Merrill Lynch, then with the Securities and Exchange Commission and the FBI.

He did so on June 20, court documents state. Negotiations with the prosecutor's office began shortly after that.

Bacanovic, who was identified only as a "financial adviser" in court documents, handled stock trades for Waksal and other members of his family.

Stewart tipped off

Stewart, identified as "the tippee," learned on Dec. 27 "that Samuel Waksal was trying to sell all of the ImClone stock that Waksal held at Merrill Lynch," the court documents state.

Elsewhere, in language drawn from insider-trading statutes, the court papers describe "confidential, material, nonpublic information that the financial adviser had misappropriated and stolen from Merrill Lynch, namely information regarding the sale of ImClone stock" by the Waksals.

"The tippee then sold all of the tippee's shares of ImClone stock, approximately 3,928 shares," the documents state, "yielding proceeds of approximately $228,000."

The trade took place one day before ImClone announced that its application for government approval of a promising cancer drug had been rejected.

Waksal had learned of the decision Dec. 26, and prosecutors say he spent the next 24 hours in a frenzy trying to sell his stock and directing others to sell their stock, too.

Shares lose $17

At the time, ImClone was trading at $63 a share. After the announcement, the price plunged to $46 a share.

The heavy trading in late December attracted the attention of regulators, and the next month the SEC began looking into Stewart's trade. Investigators interviewed Faneuil at that time by telephone, court documents say, and he "did not truthfully reveal all he knew."

He was interviewed again in early March by an FBI agent as well as SEC lawyers. Once again, he did not tell them everything, the court documents state.

And Bacanovic allegedly rewarded him. Faneuil was given extra vacation time, a free plane ticket and additional pay, "for not informing the SEC of all the true facts" about Stewart's trade, court papers said.

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