February 04, 2004 11:23 AM

The government’s star witness against Martha Stewart, former brokerage assistant Douglas Faneuil, testified in Manhattan federal court Tuesday that his boss ordered him to pass a secret tip to the domestic diva that paved the way for her well-timed sale of ImClone Systems stock.

In his much anticipated court appearance, Faneuil, 28, generally described as earnest but nervous, said that on Dec. 27, 2001, his boss, broker Peter Bacanovic, directed him to alert Stewart that the family of ImClone founder Sam Waksal was dumping its shares, reports the Associated Press.

Waksal later admitted that he had advance knowledge that the Food and Drug Administration was about to reject a new ImClone cancer drug — a decision that sent the stock tumbling. Waksal is now serving a prison term of more than seven years, for insider trading.

Stewart, 62, and Bacanovic, 41, are not accused of insider trading, but of obstructing justice by lying to federal authorities investigating the sale. Stewart also is charged with misleading investors in her own company, Martha Stewart Living Omnimedia Inc.

Stewart and Bacanovic both maintain their innocence and say they had a standing agreement to unload ImClone once the stock fell below a certain level.

On the stand, Faneuil testified that he told Bacanovic, who was then on vacation in Florida, about a flurry of selling by the Waksals that December morning. He said Bacanovic’s immediate reaction was, “Oh my God, get Martha on the phone.”

In a subsequent call, said Faneuil, Bacanovic instructed (in what the Wall Street Journal calls the most damaging testimony against Stewart so far): “You have to tell her what’s going on.” When Faneuil asked his boss if he was allowed to do that, Bacanovic said, according to Faneuil’s testimony: “Of course. You must. You’ve got to. That’s the whole point.”

When court recessed Tuesday, Faneuil had yet to tell of his subsequent phone conversation with Stewart about the Waksals’ sale of their stock, but that testimony is expected on Wednesday morning.

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