Prosecutors in the ImClone Systems inside-trading case are close to signing a plea agreement with a key witness, Merrill Lynch broker assistant Douglas Faneuil.
A plea agreement, if signed, would allow federal prosecutors to make a final approach to two prominent targets in the case: former highflying Merrill Lynch broker Peter Bacanovic and domestic-lifestyle queen Martha Stewart.
“The government sees his case as instrumental to the pursuit of other, bigger fish,” says Jack Coffee, an expert in securities law at Columbia University.
Negotiations between the government and Faneuil’s attorney have been ongoing for more than a month. Two weeks ago, assistant U.S. Attorney Michael Schachter reached an agreement with Faneuil’s attorney over the general nature of the plea deal, according to a source close to the case. Since then, both sides have been working out details.
On Thursday, The Wall Street Journal reported that Faneuil had agreed to plead guilty to a misdemeanor charge and testify on behalf of the government in any inside-trading case brought against Bacanovic or Stewart. The charge would be related to making a false statement to government investigators.
Faneuil’s attorney did not respond to repeated phone calls. A spokesman for the U.S. attorney’s office declined to comment.
Once Faneuil is in the government’s camp, prosecutors will probably give Faneuil’s former boss, Bacanovic, a final opportunity to cooperate in the investigation of inside trading in ImClone stock.
“There’s going to be a speech to Peter Bacanovic that it’s time to get on the train or get in front of it,” says former prosecutor David Gourevitch of Stueve Helder Siegel.
The investigation of Martha Stewart grew out of the prosecution of ImClone founder Samuel Waksal, who was charged last month with securities fraud, obstruction of justice and bank fraud.
On Dec. 26, Waksal learned that the Food and Drug Administration was about to deny his company’s application to market Erbitux, a cancer-fighting drug. Over the next 24 hours, according to a federal indictment, Waksal allegedly tried to sell his shares, but was rebuffed because he didn’t have approval from ImClone’s general counsel.
On Dec. 27, Waksal’s daughter Aliza sold her stake in ImClone, which was managed by Bacanovic. That day, en route to a holiday in Mexico, Martha Stewart sold her stake in ImClone after speaking with Faneuil at Merrill Lynch. On Dec. 28, the FDA announced its decision on Erbitux, and ImClone’s stock plunged.
Faneuil and Bacanovic said that Stewart had a stop-loss agreement on the stock, requiring it to be sold if the price dropped below $60 a share, which it did Dec. 27. But in June, Bacanovic was unable to provide congressional investigators with proof of the stop-loss order because it hadn’t been entered into Merrill Lynch’s internal computer system.
At that time, Faneuil changed his story and told his superiors at Merrill Lynch that there was no such order. Merrill Lynch put both men on paid administrative leave pending the outcome of the case.