Prosecutors in New York yesterday won over a potential witness in their probe of alleged insider trading by Martha Stewart, as a former Merrill Lynch & Co. stockbroker's assistant pleaded guilty to lying to investigators in the case and agreed to testify against the media executive.

Douglas Faneuil, 27, told a judge in US District Court in New York yesterday that he "didn't truthfully reveal" to authorities everything he knew about the sale last year of 3,928 shares of ImClone Systems Inc. by Stewart.

Prosecutors are trying to determine whether Stewart was acting on inside information - delivered by Faneuil and his boss - when she sold the shares a day before ImClone announced that its key cancer drug had been rejected by federal regulators.

Faneuil, a Newton native, faces up to a year in jail, but has agreed to cooperate with prosecutors in exchange for a lighter sentence.

That agreement is likely to put more heat on Stewart, said Mark Pearlstein, a partner at McDermott, Will & Emery in Boston and former federal prosecutor. Faneuil, he said, "has got every incentive at this point to truthfully cooperate with prosecutors and provide any information he has regarding potentially illegal conduct" related to the ImClone trade. "A prosecutor seeking to build a case against Martha Stewart would certainly be seeking cooperating witnesses who could testify about conversations they'd had with her."

According to court filings, Faneuil received calls on Dec. 27 from members of ImClone CEO Samuel Waksal's family or their representatives ordering that their ImClone shares be sold. The calls came the day before the announcement that the company's most promising cancer-fighting drug, Erbitux, had been rejected by the Food and Drug Administration.

Faneuil's boss, Merrill broker Peter Bacanovic, told him to alert Stewart of those sales, the prosecutors alleged. The Waksals reaped about $7.4 million in the sale of their shares. Stewart, who is a former stockbroker as well as a board member of the New York Stock Exchange, collected about $228,000, according to the court filing, avoiding about $46,000 in losses when the ImClone shares fell the next day.

Waksal was indicted in August on charges of insider trading and bank fraud. He, too, could end up providing testimony that could be damaging to Stewart, as he negotiates with prosecutors for a possible guilty plea. Faneuil and Bacanovic both were fired yesterday by Merrill Lynch.

Merrill spokesman Mark Herr said, "Merrill's role was to cooperate fully with the investigation, which we did, as is our policy." He added, "This continues to reaffirm what we've said before, and that is that all employees are required to adhere to high standards of conduct."

Faneuil's lawyer, Marc Powers [of Reed Smith's New York Office], said outside the courtroom that his client is "a young man with the guts to come forward." He noted, "Nine months ago, Doug found himself in a very difficult situation that was thrust upon him." Bacanovic's lawyer declined to comment yesterday, as did a spokeswoman for Stewart.

Faneuil said in court yesterday that he had accepted a payoff, including additional compensation, a week of vacation, and an airline ticket, to hide details of Stewart's ImClone trade from the Securities and Exchange Commission and the FBI. Bacanovic regularly paid him incentive compensation on top of his Merrill salary.

In interviews with the SEC in January and with the FBI in March, Faneuil told US magistrate Judge Kevin Fox in Manhattan yesterday, "I did not truthfully reveal everything I knew concerning the actions of my immediate supervisor and the true reason for the tippee's sales." Neither Stewart nor Bacanovic were directly named in court or in court papers yesterday. Lawyers said, however, that the "tippee" referred to in the court filings is Stewart, who is chief executive of Martha Stewart Living Omnimedia Inc.

On June 20, according to court papers, Faneuil voluntarily informed Merrill Lynch and the investigators of "the true facts" surrounding the trade. He had initially supported his boss's claim that Stewart had a standing order to sell her ImClone shares if they fell below $60.

Shares of her company, Martha Stewart Living Omnimedia Inc., fell 6.2 percent to $6.80 yesterday. The company's shares have plunged 59 percent this year, a drop analysts blame in large part on the negative publicity surrounding the ImClone controversy. The company in July lowered its 2002 profit forecasts, in part because some advertisers have shunned her magazine and television program.

Beth Healy can be reached at

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