Witness: I Tipped Off Martha Stewart

The star witness in the Martha Stewart trial last night packed the expected punch for government prosecutors when he said he had been ordered to tip the businesswoman off that shares in the drug company ImClone were being dumped by its founder.

Douglas Faneuil, a former assistant to Ms Stewart's Merrill Lynch broker Peter Bacanovic, offered compelling testimony to a rapt courtroom.

Ms Stewart and Mr Bacanovic are on trial for obstruction of justice related to the ImClone sale.

Ms Stewart sold nearly 4,000 shares in the company on December 27 2001, shortly before regulators turned down a review of a cancer-fighting drug called Erbitux that the firm had been developing.

The government alleges that Ms Stewart and Mr Bacanovic lied to investigators as they inquired into the stock sale.

Mr Faneuil detailed the events of December 27 when he was at work in the New York offices of Merrill Lynch, covering for Mr Bacanovic who was on holiday in Florida.

Before 10am that morning he said he had several conversations with the accountant for Sam Waksal, the ImClone founder and chairman, as well as his two daughters. All were trying to sell their entire stock of ImClone shares.

After being told that he could not sell his shares because of securities regulations, Mr Waksal demanded that his stock be transferred to his daughter and then sold. Mr Waksal, who later pleaded guilty to securities fraud, is currently serving a seven-year prison sentence.

The deluge of calls and the questionable legality of the sales prompted Mr Faneuil to get in touch with Mr Bacanovic, he said.

"I called Peter at around 10am _ and we started discussing the events of the morning and how crazy it was and he suddenly said 'Oh my God, get Martha on the phone'," Mr Faneuil testified.

Ms Stewart was not available and Mr Bacanovic called Mr Faneuil again shortly afterwards, he claims.

"Peter called me back and said 'Listen, Martha is going to call and you've got to tell her what is going on', and from that I understood he was referring to the Waksals because nothing else was going on. I said 'Can I tell her about Sam? Am I allowed?' He replied: 'Of course, you must. That's the whole point".' In dramatic fashion, that ended the day's testimony.

Ms Stewart and Mr Bacanovic have maintained that they had a pre-arranged agreement to sell the ImClone shares when they fell to the $60 level and that the timing of the stock sale was a coincidence. The defence hopes to discredit Mr Faneuil, who has admitted to a misdemeanour in return for cooperating with the government. He initially supported the version of events given by Ms Stewart and Mr Bacanovic.

Mr Faneuil, who now works at a Manhattan art gallery, faces up to a year in prison and a fine of up to $100,000. The government also produced a fax from Mr Faneuil to Ms Stewart's assistant detailing which stocks would be sold at year end to balance out the capital gains tax she needed to pay. ImClone was not one of them.

The prosecution had earlier focused on a $5,600 cash bonus that Mr Bacanovic had arranged for Mr Faneuil in March 2002. An administrative officer at Merrill Lynch testified that the payment was unusual, which appeared to support Mr Faneuil's claim that he was offered hush money.