New York, NY, Oct. 3—The brokerage assistant involved in alleged insider trading by Martha Stewart has cut a deal with prosecutors, pleading guilty to a misdemeanor yesterday—a move that could spell further trouble for her.
The assistant, Douglas Faneuil, entered the plea in Manhattan federal court, where he was charged with accepting gifts in exchange for not telling authorities what he knew about a controversial stock sale now under investigation.
The criminal complaint against Faneuil did not mention Martha Stewart or her broker at Merrill Lynch, Peter Bacanovic, by name, but cited details of a stock sale identical to one Stewart made last December.
"The government appears to be taking a step closer to being able to prosecute Martha Stewart through Faneuil''''s cooperation," said Daniel Horwitz, a former federal prosecutor now with Carter Ledyard & Milburn in New York.
Later on Wednesday, Merrill fired both Faneuil and Bacanovic. The firm had suspended both men on June 21 in connection with their role in arranging Stewart''''s trade.
At issue is whether Stewart violated federal securities laws by trading on inside information when she unloaded her shares of ImClone Systems on December 27, one day before the biotech firm announced damaging news.
Cooperation from Faneuil, who faces a maximum sentence of one year in prison, is likely to be a significant boost for federal investigators trying to determine whether Stewart sold her ImClone stake illegally.
Stewart, head of Martha Stewart Living Omnimedia and a New York Stock Exchange board member, maintains her stock sale was lawful and was triggered by a prior agreement with Bacanovic to sell her ImClone shares if they fell below $60 apiece.
"If the target of the government''''s investigation is Martha Stewart, and if Faneuil tipped Martha Stewart and he pleaded guilty and he''''s cooperating, yes, the government is taking the next step toward a prosecution of Martha Stewart," said Horwitz, the former federal prosecutor.
"The next step, who knows?" said Faneuil''''s lawyer Marc Powers. "He has a sentencing date for January 7 and is cooperating with authorities."
During the plea hearing, Faneuil told U.S. Magistrate Judge Kevin Fox that he had accepted money and other considerations including the continuation of compensation, an additional week of vacation and an airline ticket in exchange for holding back information from the FBI and the Securities and Exchange Commission.
The complaint against Faneuil alleges that the gifts and other considerations came from the "financial advisor" at Merrill.
"I did not truthfully reveal everything I knew about the actions of my supervisor," Faneuil said in court, adding that he also held back information as to why a Merrill Lynch client sold 3,928 shares of ImClone Systems a day before the company announced damaging news that sent its shares tumbling.
