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The guilty plea of a Merrill Lynch broker’s assistant Wednesday for trying to frustrate the insider trading investigation of home decorating magnate Martha Stewart had an unusual victim: Merrill Lynch itself. Douglas Faneuil, 27, pleaded guilty to a misdemeanor information that said he and his supervisor, a financial advisor at Merrill, “owed fiduciary and other duties” to Merrill that were violated when an unnamed “tippee,” Martha Stewart, was told in December that ImClone Chairman Samuel Waksal was attempting to sell millions of dollars in company shares. The financial adviser, Peter Bacanovic, is also the target of the U.S. Attorney’s Office in the Stewart probe. The information states that the “financial advisor” either “directly or indirectly” communicated to the “tippee” the attempted sale by Waksal and the actual sale of a large block of shares by a relative of the ImClone chairman. As a result, it states, the “tippee” sold about 3,928 shares of ImClone stock for approximately $228,000, just one day before the Food and Drug Administration delivered bad news about ImClone’s application for its anti-cancer drug Erbitux. For legal experts and practitioners, the information, which cites the Merrill Lynch manual, has echoes of another case that involved the overlap between securities fraud on one hand, and mail and wire fraud on the other. In 1987, the U.S. Supreme Court upheld convictions for mail and wire fraud in Carpenter v. United States, 484 U.S. 19, a prosecution for the advance trading of information to be published in The Wall Street Journal‘s regular column “Heard On the Street.” While the Supreme Court split 4-4 on whether information about upcoming columns constituted a violation of the securities laws, the Court said the mail and wire fraud convictions were legitimate, in part, because confidential information is property to which The Wall Street Journal deserved exclusive use. Professor John J. Coffee Jr. of Columbia Law School said the information to which Faneuil pleaded guilty was an indication the government might proceed against Bacanovic, if not Stewart, on mail or wire fraud counts as well as insider trading. “They set this up to be prosecuted under the Carpenter decision,” Coffee said. “Ordinarily, the victim is the client whose information was revealed. But by characterizing it this way, you trigger the Carpenter decision.” Ira L. Sorkin of Squadron Ellenoff Plesent & Sheinfeld, who is not involved in the Faneuil case, said the Carpenter case and its progeny make clear that the breach of duty to the institution gives prosecutors a different angle on insider trading, even though the basics of insider trading and mail and wire fraud prosecutions in connection with the purchase or sale of securities “are pretty close.” But another issue, Sorkin said, is whether insider trading can be prosecuted based on trading information that should be, but is not, made public. In the interests of transparency, the attempted sale of stock by Waksal, or the sale of a major block of shares by a relative, may have been required to be disclosed to the public in a form filed with the Securities and Exchange Commission. “If a broker tells you before that form is filed, it’s an open question whether that’s material non-public information,” Sorkin said. Bacanovic and Faneuil were fired Wednesday from Merrill Lynch, and the company said in a statement that Bacanovic is not cooperating in the investigation. Although Stewart was not named in the information, Faneuil’s lawyer, Marvin Pickholz, was asked by reporters whether Stewart was the “tippee.” “If you guys read this information and you can’t fill in the blanks, you’re in serious trouble,” he said. Faneuil pleaded guilty before Magistrate Judge Kevin Nathaniel Fox of the Southern District of New York to a single count of accepting money or other valuables “as consideration for not informing” or stonewalling FBI and SEC investigators. Although Faneuil faces as much as one year in prison for the crime, he is likely to receive little or no time behind bars as part of a cooperation agreement with the government. CASE AGAINST STEWART As for a potential case against Stewart, lawyers and legal experts differ on whether she could be prosecuted for insider trading if she was simply told that the Waksals were selling their shares, without being told the reason why or even the source of the information. But under the Carpenter case, they say, it would only have to be proven that Stewart knew that Bacanovic and Faneuil had a duty not to disclose confidential information belonging to Merrill, a task that makes mail or wire fraud counts likely to be part of any criminal complaint. “Everything is arguable here,” Professor Coffee said. “But there is strong authority in Carpenter that all you have to show is a deprivation of exclusive possession.” “This looks like they are refashioning the case so they can prosecute under mail and wire fraud as well as other theories and that does give them some relative advantages,” he said. Stewart, who has denied wrongdoing, has said she had a stop-loss order to sell ImClone shares if they fell below $60. At first, Faneuil backed up her account, but later, on June 20, he came forward to tell investigators that Stewart had left no such order.

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