NEW YORK – A federal judge on Tuesday further limited the government's effort to prove Martha Stewart (search) and her stockbroker conspired to lie about Stewart's sale of ImClone Systems (IMCL) stock.
The judge blocked prosecutors from putting into evidence a voice mail that broker Peter Bacanovic left for Stewart on Feb. 4, 2002, the day she was first interviewed by the government in the ImClone investigation.
"The fact that he tried to contact her really isn't evidence of anything, other than that they talked to each other sometimes," U.S. District Judge Miriam Goldman Cedarbaum (search) said.
The ruling was the latest in a string of setbacks for the government as it tries to present a case that Stewart and Bacanovic worked together to hatch a cover story for why Stewart sold 3,928 shares of ImClone Systems stock on Dec. 27, 2001.
Prosecutors claim Bacanovic ordered his assistant to tip Stewart that ImClone founder Sam Waksal (search) was trying to sell his shares. Stewart and the broker say they had arranged days earlier to sell ImClone at a fixed price.
The judge also said prosecutors can use two other calls between Stewart and Bacanovic only to show the pair spoke with each other on Jan. 25, 2002, the day Stewart was informed that federal prosecutors wanted to speak with her.
"I don't think you can argue that there is significance to the date without knowing the content of the call," she said.
In a boost for the government, the judge said she would allow friends of star witness Douglas Faneuil to testify about what he told them in early 2002, months before he began cooperating with the government.
Faneuil has testified Bacanovic ordered him to tip Stewart about the Waksal sales, then pressured him to cover up the truth. Faneuil initially backed up Bacanovic, then agreed in June 2002 to testify against Bacanovic and Stewart.
The judge said she would allow evidence that Faneuil apparently told friends in early 2002 that he had been asked to do something wrong. She noted the statements were apparently made when Faneuil "had no belief that he had a need to curry favor with the government."
On Friday, the judge barred evidence of another phone call, and blocked the government from calling expert witnesses as they try to show Stewart committed securities fraud.
That charge accuses Stewart of propping up the stock price of her own company, Martha Stewart Living Omnimedia (MSO), by falsely claiming she was innocent and cooperating with investigators in the ImClone probe.
Securities fraud, carrying up to a 10-year prison term, is the most serious of the five counts against Stewart. The other four -- conspiracy, obstruction of justice and two counts of making false statements -- carry five years apiece.
The arguments on the phone calls came outside the jury's presence on Tuesday, the start of the fourth week of Stewart and Bacanovic's federal trial.
In front of the jury, prosecutors and an FBI special agent walked through a full-color graphic on a projection screen that showed ImClone-related phone calls on Dec. 27, 2001.
Those calls included some from Waksal's daughters and his accountant, all wanting to sell ImClone shares. Waksal later admitted advance knowledge of the negative government report that would soon send the stock on a sharp decline.
But prosecutors were limited by the judge even in their presentation of the chart. Cedarbaum ordered the government to black out references to ImClone's falling stock price on Dec. 27, and to e-mails sent the same day.
The judge said prosecutors could tie all the information together as part of their closing argument -- but not in a single piece of evidence.
Tuesday afternoon, prosecutors put into evidence dozens of records from a system Bacanovic used to log calls and meetings he had with clients at Merrill Lynch & Co.
The records contained notes of discussions Bacanovic and Stewart had in late 2001, but no reference to ImClone between Oct. 26 and Dec. 26. Prosecutors were apparently introducing the records to shoot down Bacanovic's insistence he and Stewart agreed to sell ImClone when the price fell to $60 per share.
Prosecutors said last week they intend to rest their case Thursday. The defense is likely to take several weeks, meaning the case should go to jurors in March.