Gov't Star: Martha Took Stock Tip

The government's star witness against Martha Stewart testified Tuesday that Stewart's stockbroker ordered him to pass an ImClone Systems stock tip to the style maven just before she dumped her shares in the company.

Douglas Faneuil, a former assistant at Merrill Lynch & Co., testified that broker Peter Bacanovic ordered him to alert Stewart on Dec. 27, 2001, that the family of ImClone Systems founder Sam Waksal was trying to sell its shares.

Faneuil said he expressed concern and asked Bacanovic whether passing such a tip would be appropriate.

"Of course. You must. That's the whole point," he said Bacanovic replied.

Faneuil described a hectic morning during which he fielded calls from Waksal's accountant and both of Waksal's daughters before 10 a.m., all ordering him to sell the family's ImClone shares immediately.

Waksal later admitted he had advance word of a decision that was to be released the next day — a negative government report on an ImClone cancer drug — that would send the stock tumbling. Waksal is now serving a prison term of more than seven years.

Faneuil said he called Bacanovic, who was on vacation in Florida, to discuss the flurry of selling by the Waksals. He said Bacanovic blurted: "Oh my God, get Martha on the phone."

Faneuil's testimony contradicts Stewart and Bacanovic's claim that they had a pre-existing agreement to sell Stewart's ImClone stock when its price fell below $60 per share.

Stewart is charged with obstruction of justice, securities fraud and other counts that carry a total of 30 years of prison time. Bacanovic faces up to 25 years if convicted of perjury, conspiracy and other charges.

Faneuil testified earlier that Stewart was one of Bacanovic's two most valuable clients. Bacanovic was close enough to her that he got some shares in Stewart's company when it went public, Faneuil said.

He also praised his former boss.

"Peter (Bacanovic) was the best boss I ever had," Faneuil said. "It was a great working relationship. He was demanding yet appreciative."

Faneuil's reputation and credibility will be critical to the trial's outcome.

"Prosecutors told jurors in opening statements that Faneuil is an "admitted criminal" so clearly they are not trying to hide the fact that he initially lied about the stock trade that generated this case. And the only way Faneuil can even hope to get some credibility with jurors is if he admits that he was lying when first questioned about all of this and then says he isn't lying now," says CBSNews.com Legal Analyst Andrew Cohen.

"It's going to be a long night for Faneuil, who will go to sleep, or maybe not go to sleep, wondering what the withering cross examination of him will feel like. Stewart's lawyers are going to try to portray him as a young kid who was in way over his head and Bacanovic's lawyers are going to try to portray him as someone who is still lying to save his own skin," says Cohen.

Earlier Tuesday, Bacanovic's lawyer Richard Strassberg moved to raise doubts about Faneuil by getting his former supervisor to admit she once reprimanded him for cursing on company e-mail.

Judy Monaghan, an administrator at Merrill Lynch & Co., also testified she told Faneuil to stop using company e-mail for personal messages. Monaghan gave no details about the content of the e-mails.

Prosecutors put into evidence on Tuesday an e-mail invitation to a 2001 Christmas party at Waksal's home that went to Bacanovic.

They also tried to introduce W-2 tax forms that would have showed jurors how much money Bacanovic made at Merrill Lynch in 1999, 2000 and 2001, but U.S. District Judge Miriam Goldman Cedarbaum did not immediately allow it into evidence.

Also Tuesday, Cedarbaum blocked prosecutors from telling the jury that Bacanovic removed certain documents from his Merrill Lynch office while they were under government subpoena.

"We don't know exactly what those documents were that were removed," prosecutor Michael Schachter told the judge.

Cedarbaum said the point was irrelevant and ordered the jury to disregard the testimony about document removal.

Strassberg said the only documents removed were personnel files, that Merrill Lynch officials had authorized their removal and even watched Bacanovic and Strassberg take them.

"It's a complete red herring," Strassberg said.