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Possible Testimony Against Stewart

Sep 27, 2002 | Newsday Merrill Lynch & Co. brokerage assistant Douglas Faneuil may plead guilty to a misdemeanor charge in exchange for testimony against style guru Martha Stewart, according to a published report yesterday.

Experts said such a deal could be a break for federal prosecutors investigating possible insider trading of ImClone Systems Inc. stock last year, a move that could be a blow to Stewart, who has been caught up in the inquiry, along with former ImClone chief executive Samuel Waksal.

Waksal has been charged with tipping off family members to sell their stock in advance of the Food and Drug Administration's rejection of an application for potential cancer drug, Erbitux. No charges have been filed against Stewart, who is a friend of Waksal.

The Wall Street Journal reported that the plea deal with Faneuil has been completed, although other sources said the agreement may not yet be finalized.Prosecutors may be lining up Faneuil's testimony in advance of filing insider trading and other charges against Stewart, the chief executive of Martha Stewart Living Omnimedia, sources said.

"It really strengthens the prosecution's hand, with regard to proving insider trading charges," said Robert Heim, a former Securities and Exchange Commission investigator and partner with Meyers & Heim in Manhattan. "What they're trying to do is build a case against her."

But that may take a while, since prosecutors may first go after Peter Bacanovic, Stewart's broker at Merrill Lynch and Faneuil's boss, the "next domino," according to Columbia University Law School professor John C. Coffee.

"The walls are closing in on her, but I don't think anything will happen really quickly," said securities attorney Stephen Rinehart, with Jenkens & Gilchrist Parker Chapin in Manhattan. "They're going to do their homework first."

The contradictory stories Faneuil and Stewart have told investigators may mean Stewart could face obstruction of justice or conspiracy to make false statements charges, which may be easier to prove than insider trading, Coffee said.

A Stewart spokeswoman refused to comment yesterday, as did spokesmen from the U.S. Attorney's office and Merrill Lynch. Faneuil's attorney did not return calls for comment.

A source close to the situation disputed the Journal's claim that Waksal renewed negotiations with federal prosecutors, saying that "nothing's changed."

Investigators are trying to determine whether Stewart had inside information when she sold 4,000 ImClone shares the day before the rejection last December. Steward has denied any wrongdoing and says she made an oral agreement with Bacanovic to sell her ImClone stock if it fell below $60. Faneuil initially backed that story, but then told investigators there was no agreement.

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