NEW YORK – Martha Stewart (search) lied to cover up evidence of a suspicious stock sale after she received an inside tip from her broker, prosecutors argued Tuesday, but the defense said the case was based on speculation and guesswork, as the trial of the lifestyle trendsetter started in earnest.
Seated at the front of a packed courtroom and wearing an olive-colored pantsuit, Stewart, 62, listened intently as federal prosecutor Karen Patton Seymour told jurors that Stewart had lied to federal agents, and "multiplied that lie by feeding it to investors in her own company."
"She was told a secret that no other investor had," Seymour said.
One count accuses Stewart of deliberately trying to prop up the stock of her domestic lifestyle company, Martha Stewart Living Omnimedia (MSO), by saying in 2002 that she had done nothing wrong and was cooperating with investigators.
"She tried to mislead investors ... to lift that dark cloud hanging over her reputation," Seymour said. "Martha Stewart was worried this would be bad for her reputation."
But Stewart's attorney, Robert Morvillo, said the case against his celebrity client was circumstantial at best.
The prosecution was based on "speculation, surmise and guesswork," Morvillo said in his opening statement. "And they will ask you to ignore the lack of direct evidence."
Morvillo banged his fist on the front rail of the jury box while telling the panel there was no record of Stewart and her stockbroker, co-defendant Peter Bacanovic (search), cooking up a false explanation for the stock sale.
And he suggested that Stewart was targeted in part because of her high profile.
"There will be no direct evidence that Martha Stewart conspired to obstruct anything," Morvillo said.
Among those in the first-floor courtroom for the start of the trial were Stewart's daughter, Alexis, and her mother, Martha Kostyra.
Stewart is accused of working with her stockbroker to concoct a story about why she sold 3,928 shares of ImClone Systems (IMCL) on Dec. 27, 2001 — just before stock in the fledgling biotechnology company plunged when the government refused to review Erbitux (search), an ImClone cancer drug and the only drug in the company's pipeline.
The government claims Stewart was tipped that ImClone founder Sam Waksal (search) was trying to dump his own shares. Stewart and Bacanovic, who is Stewart's co-defendant, say they had a pre-existing agreement to sell the stock when it fell to $60 per share.
Stewart has denied the charges, but could face 10 years in prison if convicted of the most serious crime, securities fraud. Bacanovic has also denied the charges.
In a blow to the defense team, U.S. District Judge Miriam Goldman Cedarbaum has ruled that Stewart's lawyers cannot argue before the jury that she is being prosecuted because of her fame. The judge also barred Stewart's lawyers from asking jurors to speculate why prosecutors did not bring insider trading charges against their client.
Key testimony for the government's case is expected to come from Douglas Faneuil, Bacanovic's former assistant at Merrill Lynch, set to be the prosecution's third witness. Faneuil has pleaded guilty in the case and is cooperating with prosecutors.
Under his plea agreement, Faneuil admitted lying to investigators twice in 2002 about the circumstances surrounding the stock sale.
Faneuil is expected to contradict Stewart and Bacanovic about the reasons behind the sale of ImClone stock when he takes the stand. But defense lawyers have issued subpoenas seeking to challenge his credibility.
They want to see papers relating to Faneuil's statement to prosecutors that his former defense lawyer advised him to lie to regulators. It is unclear why Faneuil was told to lie, but the advice was given after the lawyer spoke to a Merrill Lynch attorney.
Cedarbaum said Tuesday that she would rule later on whether those papers could be admitted.
On Monday, Cedarbaum told jurors it was critical that they decide the case only on the evidence — and ignore the onslaught of media coverage surrounding Stewart's every move.
"If you see a headline about the case, turn the page. Look at another story," the judge said after jurors took an oath of service. "If you hear something about the case, change the channel."
The judge had complained about heavy pretrial publicity and had barred reporters from watching jury selection.
The jury, seated Monday, includes eight women and four men from diverse backgrounds, including a reverend, a translator and a pharmacist familiar with the style guru's recipes.
Many of them told Cedarbaum they had read or heard about the case already. But they described only vague knowledge of the case, and assured the judge they could be impartial.
One of the jurors is a pharmacist originally from Uganda who said she had seen Stewart frequently "in the TV sometimes — her cooking recipes and stuff." But she said she had not paid close attention.
One juror is a paralegal who translates Italian and owns stock in Merrill Lynch & Co. — the brokerage where Bacanovic managed Stewart's account, including the ImClone shares.
Another is a reverend who told the judge she counsels married couples.
Reuters and the Associated Press contributed to this report.