Prosecutors: Stewart Lied to Prop Up Stock Prices

Pointing to fluctuations on a stock graph, prosecutors tried to prove Wednesday that Martha Stewart (search) tried to prop up the value of her own company by lying to her investors about why she sold ImClone Systems (IMCL) stock.

Jurors saw a bright-red chart of Martha Stewart Living Omnimedia (MSO) stock that showed brief spikes in price after Stewart issued two statements in June 2002 denying wrongdoing in the ImClone investigation.

In both statements, Stewart denied receiving advance word on Dec. 27, 2001, just before she dumped ImClone stock, that the government would reject ImClone's cancer-fighting drug. The government never charged her with insider trading.

But Stewart also insisted she and her stockbroker had a prior deal to sell ImClone when it fell below $60. The government contends that never happened, and that Stewart was tipped that ImClone CEO Sam Waksal (search) was trying to sell.

Prosecutors contend Stewart, trying to protect the hundreds of millions of dollars she had in her own company's stock, was misleading her investors. The charge, securities fraud, is the most serious of the five against her.

U.S. District Judge Miriam Goldman Cedarbaum (search) has called the charge "novel," and Stewart lawyer Robert Morvillo indicated Wednesday he would ask her to dismiss the count when the government rests its case later this week.

Stewart and broker Peter Bacanovic (search) are charged with other crimes, including conspiracy and obstruction of justice, related to Stewart's explanation for her ImClone sale.

The government and defense spent much of the day highlighting for jurors segments of news articles that appeared after news of the ImClone probe broke in June 2002.

The judge repeatedly warned lawyers and the jury that the articles were not evidence.

"The fact that you hear what the articles say does not mean that any of those statements are true," Cedarbaum told jurors at one point. "It just means that was the publicity at the time."

Morvillo pointed to news accounts speculating Stewart sold the stock on insider information and was romantically linked to Waksal, which Stewart has denied. Waksal is serving a seven-year prison sentence for insider trading.

In one, a Minnesota Public Radio anchor says: "It looks like Martha Stewart may have kissed and sold."

Stewart lawyers also suggested any boost the stock price received from her statements, on June 12 and June 18, 2002, was short-lived. Martha Stewart Living Omnimedia dropped from $19.01 on June 6 to below $15 on June 19.

But prosecutors pointed to articles that showed investors were jittery about Stewart's connections to Waksal, a longtime friend, after Waksal was arrested on June 12, 2002.

"The government highlights these portions to show what the market thought was important at the time," prosecutor Michael Schachter told the judge outside jurors' presence.

Prosecutors said they expect to rest their case late Thursday or Friday.

Jurors will hear Thursday from an ink expert who is expected to testify that Bacanovic used two different inks on a worksheet of Stewart's stock sales in late 2001.

The government contends he used the second pen to add a notation of "60" after she sold, to make their supposed agreement seem legitimate. Bacanovic's lawyers contend he simply used separate pens.

Stewart faces up to 30 years in prison on the counts she is charged with, while Bacanovic faces 25. Either would likely receive much less time under a Congress-mandated formula judges use to determine sentences.

Meanwhile Wednesday, a federal appeals court ruled the judge overseeing the trial was wrong to bar the news media from jury selection.

U.S. District Judge Miriam Goldman Cedarbaum said she kept reporters out of the process — usually open — because she was worried jurors might be less forthcoming about possible bias if they knew reporters were watching.

But the 2nd U.S. Circuit Court of Appeals, in a broad critique of Cedarbaum's decision, called the media "a vital means to open justice" and said she had not met the heavy burden required to close jury selection.

"The mere fact of intense media coverage of a celebrity defendant, without further compelling justification, is simply not enough to justify closure," the appeals court ruled.