February 04, 2004 11:23 AM

In the moment the prosecution has been waiting for, Martha Stewart trial star witness Douglas Faneuil told jurors on Wednesday that he illegally passed a secret stock tip to the domestic diva just before she dumped thousands of shares in ImClone, reports Reuters.

Faneuil, 28, a former broker’s assistant at Merrill Lynch, said he gave the tip to Stewart over the phone on Dec. 27, 2001, when she sold her nearly 4,000 shares in the biotech company.

In his second day on the stand, Faneuil admitted that he illegally tipped off Stewart that the family of Sam Waksal, Stewart’s friend and ImClone’s founder, was disposing of its shares. (Faneuil has already secured a plea bargain with prosecutors in exchange for his testifying against Stewart and her stockbroker — Peter Bacanovic, Faneuil’s former boss.)

In his testimony inside Manhattan federal court, Faneuil said Stewart phoned him at Merrill Lynch on Dec. 27 while he was covering for his boss. (Bacanovic was on vacation in Florida.) Upon answering the phone, Faneuil said, he heard, “Hi this is Martha. What’s going on with Sam?”

“I told her that Sam was trying to sell,” Faneuil explained to jurors, referring to Waksal. After asking about ImClone’s stock price, “she said ‘I want to sell all my shares,’ ” Faneuil testified.

Stewart, 62, and Bacanovic, 41, are accused 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.

In his Tuesday testimony, Faneuil said that he had told Bacanovic 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: “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.”

Faneuil also said Stewart became enraged when he suggested he could e-mail her assistant once the ImClone sale had been completed. “Absolutely not!” Faneuil said Stewart exploded at him. And even after he apologized to her, Faneuil said, Stewart continued to repeat, “Absolutely not, you can’t do that!”

Under questioning by Stewart’s lawyers, Faneuil admitted he had smoked marijuana and used Ecstasy, though never during office hours, and that he had shared this information with the FBI when he began cooperating with prosecutors in exchange for a lighter sentence.

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