Martha Witness Tells Of Cover-up

An "extraordinarily upset" Martha Stewart ordered all her ImClone Systems stock sold after she learned the company founder was dumping his own shares, the prosecution's star witness testified Wednesday at the homemaking mogul's trial.

Douglas Faneuil, a former assistant at Merrill Lynch & Co., said he passed along the tip to Stewart on orders from her broker Peter Bacanovic when she called on Dec. 27, 2001.

"Peter thought you might like to act on the information that Sam is selling all of his shares," Faneuil said he told Stewart, referring to ImClone founder Sam Waksal.

Faneuil said he quoted ImClone's stock price, and Stewart eventually declared: "I want to sell." Faneuil placed the sell order, netting her about $228,000.

The Food and Drug Administration issued a negative report the next day about ImClone's experimental cancer drug, sending the stock down 18 percent. Stewart saved about $50,000 by getting out when she did. Waksal is serving a seven-year prison sentence for securities fraud and other charges.

Faneuil's testimony is the centerpiece of the government's case against Stewart and Bacanovic, who are accused of repeatedly lying to investigators by insisting they had a pre-existing agreement to sell the stock when it fell to $60.

"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," said CBSNews.com Legal Analyst Andrew Cohen.

Faneuil, 28, described a frantic effort by Bacanovic in the months after the sale to pressure him into supporting two separate cover stories. He said the broker offered him a week's vacation and a trip to Argentina in early 2002.

He said Bacanovic first told him the reason for the sale was to generate tax losses to offset capital-gains taxes, then claimed he and Stewart had a pre-existing agreement to sell the stock when it fell to $60.

But Faneuil said even Stewart's financial assistant questioned the tax-loss justification because the stock was sold at a gain for Stewart. She had sold many other stocks earlier in December at a loss for tax purposes.

In January 2002, as the investigation into Stewart's stock sale was growing, Faneuil described the explanation that an animated Bacanovic gave him in a discussion in Bacanovic's office.

Faneuil said Bacanovic told him: "Listen, I've spoken to Martha, I met with her, and everyone's telling the same story. This was a $60 stop-loss order. That was the reason for her sale. We're all on the same page, and it's the truth. It's a true story."

"What the prosecutor is doing is they are setting up the stage for what Martha knew and when she knew it, and how she acted upon that knowledge," legal expert Jeanne Pirro told CBS News Correspondent Sharyn Alfonsi.

Stewart glanced back and forth at Faneuil and prosecutor Karen Patton Seymour while Faneuil testified, making notes on a legal pad. Bacanovic made notes as well, and appeared to scoff occasionally when Faneuil described parts of the story that included him.

Faneuil's testimony is the centerpiece of the government's case against Stewart and Bacanovic, who are accused of repeatedly lying to investigators by insisting they had struck the $60 arrangement before the sale.

Stewart faces five counts carrying a potential prison term of 30 years. Bacanovic faces five counts carrying 25 years. Both would likely get lighter sentences if convicted.

Faneuil originally supported Stewart and Bacanovic's version, but struck a deal with the government in June 2002 to plead guilty to a misdemeanor and cooperate with prosecutors.

Asked Wednesday to explain why he changed his story, Faneuil said: "There came a point in time where I just couldn't continue to lie. I felt that the coverup was part of my daily existence, and I just couldn't take it anymore."

As cross-examination began, Faneuil admitted he has used cocaine, marijuana and the party drugs Ecstasy and ketamine, sometimes called Special K. But he described the cocaine and ketamine uses as extremely limited, and said he had never been under the influence of any drugs during the workday at Merrill Lynch.

He also acknowledged that Bacanovic never "explicitly" directed him to lie.

David Apfel, a lawyer for Bacanovic, asked questions intended to show Faneuil was willing to tell the government whatever it wanted in exchange for not being prosecuted.

But when Apfel asked Faneuil whether he knew it was a violation of Merrill Lynch policy to pass information about Waksal's account to another client, he implicated Bacanovic.

"Peter told me it was something I should do," Faneuil answered. "I never dreamed that he'd be telling me to commit a crime."

A routine clause in Faneuil's 2002 cooperation agreement requires him not to break the law.

Stewart's attorney, Robert Morvillo, claims Faneuil broke that clause when he smoked marijuana on an April 2003 trip to Jamaica, and said the government should have "torn up" its agreement with Faneuil.

But the judge did not allow defense lawyers to ask Faneuil about the trip, saying such a line of questioning amounted to "an attack on the motive of the government in presenting this case."

Faneuil is to return for more cross-examination Thursday.

Faneuil testified earlier that on Dec. 27, he took calls before 10 a.m. from Waksal's accountant and Waksal's two daughters — all demanding that Faneuil sell their ImClone shares.

Bacanovic ordered him to "get Martha on the phone" when he learned of the selling, and she called Bacanovic's office that day just after 1:30 p.m.

"Hi, this is Martha," Faneuil said the call began. "What's going on with Sam?"

Faneuil said he related the information about the Waksal selling, and that Stewart wondered aloud how she could be sure her own sale had been completed.

Faneuil said he suggested he could send an e-mail to Stewart's assistant, but Stewart told him he could "absolutely not" discuss her personal business with her assistant.

"Ms. Stewart started getting extremely upset," Faneuil said.