Prosecution Rests in Martha Stewart Trial

The government rested its case Friday against Martha Stewart (search) and her stockbroker, and a judge said she would hear arguments next week on whether some charges in the case should be thrown out.

Prosecutors called 21 witnesses over 14 days of testimony, all designed to prove Stewart lied about why she sold 3,928 shares of ImClone Systems (IMCL) stock in December 2001.

Lawyers for the homemaking mogul and her broker, Peter Bacanovic (search), planned to spend the weekend drawing up papers urging U.S. District Judge Miriam Goldman Cedarbaum (search) to dismiss all nine counts against each defendant.

Cedarbaum indicated she would hear arguments on the matter Monday morning but strongly suggested she was unlikely to even come close to tossing out the entire case.

"We all understand that there are substantial portions of this indictment that will not be dismissed — at this point, in any event," she said.

The government contends Bacanovic sent word to Stewart on Dec. 27, 2001, that ImClone CEO Sam Waksal (search) was trying to dump his shares in the company. Stewart sold hers that day, netting about $225,000.

Stewart and Bacanovic say they had a standing agreement that her ImClone shares would be sold when the stock fell to $60 per share.

The judge appeared to be most concerned about a count of securities fraud that accuses Stewart of deceiving investors in her own company, Martha Stewart Living Omnimedia (MSO), by asserting her ImClone sale was based on the $60 order.

Cedarbaum called that count "the most problematic" in the indictment, and urged lawyers to focus on whether or not Stewart had criminal intent — not just a motive — to lie to her investors.

In a brief argument on the matter Friday, prosecutor Karen Patton Seymour pointed to remarks Stewart made at an investor conference on June 19, 2002, when she insisted she had a $60 selling agreement for ImClone.

The government contends Stewart made several statements in June 2002 to prop up the stock price of MSLO. Stewart stood to lose $30 million for every dollar the stock dropped at the time.

"She knew and she hoped investors would rely on her word," Seymour said. "She didn't just say it for no reason. She said it purposefully."

Stewart lawyer Robert Morvillo said Stewart was truthful in the essential part of her remarks that day — that she was never tipped directly by Waksal about the pending government drug review that sent ImClone shares into a tumble.

While media speculation at the time wondered whether Stewart was guilty of insider trading, Stewart was never accused of knowing about the drug review in advance — only of knowing that Waksal was trying to sell.

In front of jurors Friday, a critical prosecution witness wavered slightly about testimony that had damaged Stewart.

Mariana Pasternak (search), a close friend of Stewart, testified Thursday that Stewart told her shortly after selling ImClone stock that she had been aware Sam Waksal was trying to dump his shares.

In a separate conversation, Pasternak testified, Stewart told her, "Isn't it nice to have brokers who tell you those things?"

But under cross-examination Friday by Morvillo, Pasternak said it was possible that remark was simply a thought that crossed her own mind — not something Stewart said.

"It is fair to say I do not know if that statement was made by Martha or if that was just a thought in my mind," she said.

Prosecutor Michael Schachter, trying to bolster Pasternak's credibility, asked what her "best belief" was about the remark.

"That Martha said it," Pasternak replied.

Pasternak never wavered in the central element of her testimony — that Stewart was aware when she sold her ImClone shares that Waksal had been trying to sell as well.

Stewart told investigators in April 2002 that she had no memory of being told about Waksal just before she sold.

The government also sought to bolster the testimony of Douglas Faneuil (search), a former Merrill Lynch & Co. (MER) assistant. The government's star witness testified that he passed the tip about Waksal from Bacanovic, his boss, to Stewart.

Faneuil initially supported the $60 story. But he struck a cooperation deal with the government in June 2002 and agreed to testify against Stewart and Bacanovic — an indication, the defense says, that he is a liar.

Two friends of Faneuil testified Friday that he was distraught in January 2002, long before he changed his account, and that he confided in them that he was being pressured by his boss to lie.

One of the friends, Zeva Bellel, recalled a Jan. 4, 2002, conversation in which Faneuil described asking Bacanovic whether it was appropriate for him to pass the tip to Stewart.

"It's not a question of whether you can do it or not," Faneuil described Bacanovic saying, according to Bellel. "Just do it."

Bacanovic's defense team presented its first witness Friday, a 10-year client of Bacanovic's at Merrill Lynch & Co. who testified the broker was meticulous and honest in tending to his large portfolio.

"He worried about my stocks every day," client Kenneth Rainin testified.