Stewart Judge Blasts Prosecution

NEW YORK – A federal judge criticized prosecutors in the Martha Stewart trial for waiting too long to give defense attorneys a copy of an FBI report that could damage the government's case.

Answering defense complaints, U.S. District Judge Miriam Goldman Cedarbaum (search) on Thursday postponed the testimony of Douglas Faneuil (search), the government's star witness, for a week — interrupting the prosecution at a key point in the case.

And jurors — who filled out questionnaires in the case Jan. 6 but have yet to hear a full day of testimony — were sent home until Monday, told by the judge only that there had been a "bit of a mix-up."

Faneuil was ready to testify Thursday that he gave Stewart a secret tip from her stockbroker, Peter Bacanovic (search), that led her to sell nearly 4,000 shares of ImClone Systems (IMCL)stock in 2001, just before it plummeted on bad news.

But late Wednesday, prosecutors faxed to defense lawyers a document that raises doubts about whether the stockbroker ordered that the tip be passed on — and whether Faneuil himself recalls the episode clearly.

The document was an FBI report on an interview that Jeremiah Gutman, Faneuil's former attorney, gave to federal authorities in January 2003.

An FBI account of the interview says Gutman told investigators that Faneuil had said "he had been instructed by Bacanovic or Waksal to pass information on to Martha Stewart about ImClone," according to a person who has seen the FBI account and discussed it with The Associated Press on condition of anonymity.

Prosecutors suggested in court Thursday that the document shows only that Gutman, who is more than 80 years old, does not have a clear recollection of Faneuil's account.

It was "Mr. Gutman's memory which is the memory failure here," prosecutor Karen Patton Seymour told the judge.

In either case, lawyers for Stewart and Bacanovic complained that they should have received the document weeks or months ago.

"I do think that the government should have turned over this information sooner," Cedarbaum said.

Late Wednesday, Cedarbaum ruled that prosecutors must turn over notes from Gutman, including material from the period when he represented Faneuil.

Yet the judge refused to give Bacanovic's attorney the remedy he wanted — a mistrial or a dismissal of all charges against the ex-broker.

But the delay in Faneuil's testimony was a boon to the defense, forcing the government to scramble its schedule of witnesses and running the risk of confusing jurors, one legal expert said.

"While it's not necessarily fatal, this can be a bit of a crack in the armor," said Gregory J. Wallance, a former federal prosecutor. "Now the question becomes how much can the defense exploit it."

The government says Bacanovic told Faneuil to tip Stewart on Dec. 27, 2001, that ImClone founder Sam Waksal was selling his shares. Waksal has admitted getting early word of the negative drug review.

Prosecutors say Stewart and Bacanovic told an ever-growing series of lies to cover up the reason for the stock sale, and that Stewart deceived investors in her own company, Martha Stewart Living Omnimedia (MSO).

Stewart and Bacanovic say they had agreed a week earlier to sell ImClone if the stock fell to $60 per share. Bacanovic's attorney has suggested Faneuil, starstruck by the domestic style setter, decided on his own to tip her off.

The prosecution said it believes it was under no obligation to turn over the document earlier, and had complied with federal rules by alerting the defense that investigators were speaking to Gutman.

Seymour, the lead attorney in the case, told the judge the decision would hamper the prosecution's ability to "provide the foundation" for the government case.

"Mr. Faneuil will provide an extensive background to the underlying crimes," she said.

When defense attorneys get around to cross-examining Faneuil, they will likely use the newly disclosed evidence to convince jurors that Faneuil, whom they have repeatedly called a liar, cannot be trusted.

Defense attorneys will use the week to learn more about Gutman, who they say has declined to speak with them, and possibly to try to question Waksal himself, who is in a federal prison in Pennsylvania, about the matter.