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A composed Douglas Faneuil said Tuesday that his boss, stockbrokerPeter Bacanovic, told him to warn Martha Stewart that it was time tosell her shares in ImClone Systems Inc. on Dec. 27, 2001. “He just said ‘Oh my God, Get Martha on the phone,’” said Faneuil,a key witness in the government’s obstruction case against Stewartand Bacanovic. The 28-year-old broker’s assistant said that his phone conversation withthe vacationing Bacanovic took a more ominous turn, when he askedhis boss whether it was appropriate to tell Stewart the real problemwith ImClone: that company founder and Stewart’s confidant, SamuelWaksal, was trying to unload millions of dollars of shares in ImClonehimself. “Of course you must,” Bacanovic allegedly replied. “That’s the wholepoint.” Faneuil was testifying under a cooperation agreement with thegovernment reached in 2002, after he admittedly stopped lying toinvestigators about Stewart’s reasons for selling her 3,928 sharesin ImClone, and pleaded guilty to accepting extra compensation from hisboss in return for keeping the truth from the government. Under questioning from prosecutor Karen Patton Seymour, Faneuilrelated how he had only been with Merrill Lynch as a client associatefor six months when the floodgates opened on the morning of Dec. 27. Faneuil was covering the desk for Bacanovic when at about 9a.m., Waksal’s daughter, Aliza Waksal, called and said she wanted tosell all of her 39,472 ImClone shares. Faneuil did not know at the time that Waksal had learned thatthe Food and Drug Administration was about to deal a regulatory setbackto the company’s cancer drug, Erbitux, and the company’s stock was aboutto plummet on the news. The sales and attempted sales would eventuallycost Waksal a sentence of 7 years and 4 months in a federal prisonfor insider trading, among other things. Shortly after speaking to Aliza Waksal, Faneuil received a call fromSamuel Waksal’s accountant, Alan Goldberg, who instructed him to sellall of Waksal’s stock. When Faneuil said he could not make the sale because Waksal wasa chief executive, subject to insider sales filing requirements, Goldberg told him to transfer all of Waksal’s 79,797 shares to AlizaWaksal’s account, presumably for sale. Again, Faneuil said he could not make the transaction. Goldbergresponded by telling him to call Bacanovic and ask him. Faneuil called Bacanovic, who confirmed that the transfer wasout of the question. Bacanovic nonetheless asked the assistant tocheck with a Merrill Lynch compliance officer, who confirmed thetransfer could not be done. And it was after Faneuil told Bacanovic by phone “how crazy”everything had been that morning, including the pressure being appliedby Goldberg, he said “Oh my God. Get Martha on the phone.” Faneuil dialed the offices of Martha Stewart Living Omnimedia, andpatched Bacanovic through to Stewart’s assistant Ann Armstrong. Bacanovic left a message with Stewart and ended his phone callwith Faneuil. At about 10 a.m., Faneuil spoke with Bacanovic again. “Peter called me back and said ‘Listen, Martha’s going to call and youhave to have to tell her what’s going on,’” Faneuil said. Judge Miriam Goldman Cedarbaum then dismissed the jury for the day. Faneuil is set to take the witness stand again this morning todiscuss his contact with Stewart and his actions as theinvestigation into her sales unfolded. Following his direct examination, Faneuil is expected to be cross-examined by a defense team led byRobert Morvillo of Morvillo, Abramowitz, Grand, Iason & Silberberg. Stewart is not charged with insider trading, but the governmentcontends that its probe into the stock sales led Stewart and Bacanovic to invent the story that they had a prearranged understandingto sell her ImClone shares at a certain price. In addition to conspiracy to obstruct justice, Stewart is accused ofobstruction, lying to federal investigators and misleading investors inMartha Stewart Living Omnimedia about her actions during the ImCloneprobe. Bacanovic is also accused of obstruction, perjury and makingand using a false document.

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