Assistant: Martha Had Me Change Message Log

With an investigation looming, Martha Stewart (search) sat down at her assistant's computer and altered a record of a message left by her stockbroker about ImClone Systems (IMCL) stock, the assistant testified Tuesday.

Stewart immediately stood up and ordered the message restored to its original wording, Ann Armstrong (search) said.

Prosecutors hope the testimony will bolster the essential point of their case -- that Stewart tried to cover her tracks after she dumped her ImClone shares in December 2001.

In hopes of convincing jurors Stewart lied about the sale, the government followed Armstrong's testimony with that of a government investigator who said Stewart later claimed not to recall seeing the message at all.

Click here to view Stewart's message log.

The original message read: "Peter Bacanovic (search) thinks ImClone is going to start trading downward." It reflected a call by Bacanovic on Dec. 27, 2001, the day Stewart sold her 3,928 shares in the company.

Armstrong testified Stewart saw the message about a month later, on Jan. 31, 2002, and replaced it with the words: "Peter Bacanovic re imclone."

"She instantly stood up, still standing at my desk, and told me to put it back to the way it was," the assistant testified at Stewart's stock-fraud trial in federal court.

Armstrong told jurors she was "startled" by Stewart's conduct, and that she had never before altered a message in the log, which Armstrong maintains at Martha Stewart Living Omnimedia, Stewart's media company.

Several days later, Stewart claimed she did not recall any record of Bacanovic's message from the day of the sale, according to Helene Glotzer, a Securities and Exchange Commission lawyer.

Glotzer testified that Stewart also said she did not recall hearing that ImClone founder Sam Waksal and his family were trying to dump ImClone stock. Stewart also said she sold her ImClone stock in a call with Bacanovic, Glotzer said. His assistant, Douglas Faneuil, handled the sale.

Glotzer also testified Stewart changed her story during the interview -- first saying she and Bacanovic had the same recollection of a $60 agreement, then saying she did not know what Bacanovic's recollection was.

At the end of the February interview, Stewart said: "Can I go now? I have a business to run," Glotzer testified. She described Stewart's tone as "curt, annoyed."

Earlier, prosecutors walked Armstrong through her memory of January and early February 2002 in hopes of convincing jurors Stewart was worried about the circumstances of her sale of ImClone.

They introduced a calendar entry showing Bacanovic scheduled a breakfast with Stewart at a Manhattan restaurant on Jan. 16, 2002, about three weeks after the stock sale.

The government alleges Stewart was tipped by Bacanovic that Waksal's family was trying to sell its shares on Dec. 27. Stewart and the broker say they had a pre-existing deal to sell ImClone at a fixed price.

The day after Stewart sold her ImClone shares, the company announced a negative decision from government regulators about an ImClone cancer drug. The stock plummeted.

Stewart had met with or spoken to her lawyers on each of the three days before she changed the log, Armstrong said. Four days later, on Feb. 4, Stewart met with government investigators including Glotzer for the first time in the ImClone probe.

The altered message log represents one of the most critical pieces of evidence in the government's case against Stewart, who is charged with obstruction of justice and securities fraud, among other counts.

Another is a worksheet that prosecutors say Bacanovic doctored after the stock sale to make it appear he and Stewart had previously discussed a plan to sell ImClone when it fell to $60 per share.

Outside the presence of the jury, Armstrong said one of Stewart's lawyers, John Cuti, called her later on Jan. 31 after Stewart changed the message.

"He said something to the effect of, you know, 'Do not touch anything, just stop in your tracks, and I need to talk to you later,"' Armstrong said.

Armstrong shut her computer down for the day, but retrieved the message's original wording in the days that followed. She printed a copy of the original wording and saved it in a manila envelope.

Under questioning from Stewart lawyer Robert Morvillo, who was trying to limit damage from the testimony, Armstrong testified Stewart called her the night of Jan. 31 and asked her to keep trying to restore the original wording.

"Did she ever ask you to lie or cover up this incident?" Morvillo asked.

"No," Armstrong replied.