"Oh, My God! Get Martha On The Phone."

By Michele Orecklin

It was Martha Stewart, in all her tarnished glory, who drew the news cameras, the spectators jockeying for good seats, the visit from Rosie O'Donnell. But it was the slight, soft-spoken 28-year-old Douglas Faneuil, in his plain gray suit and tie, who last week owned the room inside the lower-Manhattan federal courthouse where Stewart is facing criminal charges for obstruction of justice and securities fraud. Faneuil is the former assistant to Peter Bacanovic, Stewart's broker at Merrill Lynch and her co-defendant in the trial. For three days Faneuil electrified the jury with his tales of Stewart's abrasive telephone manner and his boss's frantic efforts to cover up a potentially illegal stock transaction. His performance was so riveting that at one stage the defense asked if he had taken acting lessons.

After a shaky start, the government made strong headway last week in its attempt to prove that Stewart sold shares in the biotech firm ImClone Systems on the basis of privileged information and then lied to federal investigators about why she sold when she did. Faneuil is the government's key witness and his testimony could ultimately lay low the high priestess of housewares.

With unforced charm, Faneuil, who looks barely old enough to attend a prom, recounted for lead prosecutor Karen Patton Seymour how it all started, on the morning of Dec. 27, 2001. Bacanovic, 41, was on vacation in Florida, and Faneuil had been left to man the office phones. He fielded a series of calls from family members of ImClone CEO Sam Waksal, also a Bacanovic client. They were eager to unload their shares in the biotech firm. Flustered, Faneuil called Bacanovic. When Faneuil told his boss about the Waksals, Bacanovic blurted out, "Oh, my God! Get Martha on the phone." Faneuil said he took this to mean his boss wanted to warn his prize client to sell her ImClone shares. But Bacanovic was only able to leave a message for Stewart, who was en route to Mexico, and he told Faneuil to expect her return call. "Can I tell her about Sam? Am I allowed to?" Faneuil recalled asking. "Of course," came Bacanovic's reply, according to Faneuil. "That's the whole point."

When Martha called back, Faneuil said, he told her, "Peter thought you might like to act on the information that Sam Waksal was trying to sell all his shares." She asked what ImClone's price was ($61.53), then ordered Faneuil to dump her 3,928 shares.

On Dec. 28 the Food and Drug Administration (FDA) issued a negative ruling on ImClone's experimental anticancer drug. The shares tanked after ImClone disclosed that news. Stewart saved at least $45,000 by selling her shares when she did, for $58.43. A few days after the sale, Merrill Lynch compliance officials quizzed Faneuil about the transaction. He then conferred privately with Bacanovic, who insisted the sale had been made to help Stewart offset taxes on other stock gains. But when Stewart's financial adviser angrily complained to Faneuil that the ImClone shares had been sold at a profit and "screwed up" previous tax calculations, Faneuil went back to Bacanovic. At that point, he claimed, Bacanovic changed his story, saying that Stewart had a standing order to sell the shares if they fell below $60. Faneuil said that despite his misgivings, his attempts to question Bacanovic, a star at Merrill Lynch with a stable of celebrity clients, were peremptorily cut off. Faneuil described a conversation in a coffee shop near their office in midtown Manhattan when he told Bacanovic: "I was on the phone. I know what happened." Bacanovic put his arm on Faneuil's shoulder and said, "With all due respect, no, you don't." When questioned by prosecutors who were then looking into the case, Faneuil repeated the standing-order story. He said he feared he would lose his job if he did not.

Eventually, because of what he said was a guilty conscience, Faneuil approached federal investigators, admitted he had lied, and agreed to testify against Bacanovic and Stewart. In return, he was charged with a misdemeanor for initially misleading the government.

Before Faneuil took the stand, the trial had been proceeding at a deadening pace. Bored with technical details about the securities industry, spectators contented themselves with divining Stewart's state of mind based on the few outward clues she exhibited: the succession of somber black pantsuits, the weak but polite smile she managed for news cameras, the strain that only occasionally surfaced on her heavily made-up face. When Faneuil finally appeared, a jolt of excitement was palpable in the courthouse. He proved such an engaging witness that he kept the room rapt. By the time defense attorneys got to cross-examine Faneuil on Wednesday, they badly needed to undermine his credibility.

Bacanovic's attorney David Apfel had first crack, repeatedly referring to Faneuil as an admitted "liar" who had smoked pot and taken the drug ecstasy. But when he set out to prove that Faneuil harbored a grudge against Stewart, he mainly succeeded in making people wonder why everyone else didn't harbor one as well. At Apfel's prompting, Faneuil recounted an incident when Bacanovic had put Stewart on hold while he searched for some papers. After a few minutes he asked his assistant to pick up the phone and tell Stewart he would not be much longer, but by then Stewart had worked herself into a lather and barked, "Tell Peter Bacanovic I'll leave him and Merrill Lynch unless the hold music [is] changed." Then came the e-mail. On a large screen, Apfel projected an e-mail Faneuil had written to a friend in October 2001: "I just spoke to MARTHA! I have never, ever been treated more rudely by a stranger on the telephone." Later in the message, he wrote that Stewart complained about the phone manner of Merrill employees: "She made the most ridiculous sound I've heard coming from an adult in quite some time, kind of like a lion roaring underwater." But Faneuil's crowning moment came in another e-mail, in which he wrote, "Martha yelled at me again today, but I snapped in her face and she actually backed down! Baby put Ms. Martha in her place!!!" The jury snickered as Stewart flinched.

Legal experts agreed the week had not gone well for Stewart. Greg Markel, chair of the litigation department at the New York City--based law firm Cadwalader, Wickersham & Taft, says revealing the email backfired, and Apfel may have created a chasm between the two defense camps. "It seems to me it was never a particularly strong point for Bacanovic," says Markel. "And for Martha, it played completely differently. She just looks like an ogre."

Faneuil's apparent credibility as a witness may leave the defense no choice but to let Stewart take the stand to try to refute his testimony. Stewart's lawyers would rather she didn't, as she can be a polarizing figure. It's the ultimate gamble, and if she loses it, she could join her friend Waksal, who is imprisoned for securities fraud. In an ironic twist, Waksal's company, ImClone, the source of their troubles, has rebounded. Encouraging research on its colon-cancer drug Erbitux has sent the stock price back up to about $41, after it plunged to as little as $6 in the fall of 2002. This week, as federal prosecutors try to bottle up Stewart, another federal agency, the FDA, could release Erbitux for the public benefit.

--Reported by Simon Crittle/New York

With reporting by Simon Crittle/New York