- The Washington Times - Friday, February 13, 2004

NEW YORK (AP) — A federal judge dealt a blow yesterday to the government’s effort to prove Martha Stewart committed securities fraud when she publicly proclaimed her innocence during an investigation of a stock sale.

U.S. District Judge Miriam Goldman Cedarbaum blocked any expert testimony on whether investors in Mrs. Stewart’s homemaking empire would have considered her public statements about her ImClone Systems sale important.

The securities fraud count — the most serious count against Mrs. Stewart — accuses her of propping up the stock price of her company, Martha Stewart Living Omnimedia, by claiming in 2002 that her ImClone sale was proper and that she was cooperating with authorities.

Securities fraud carries a potential 10-year prison term. The other four charges against Mrs. Stewart each carries a five-year term. If convicted on any count, she would likely get much less than the maximum under federal guidelines.

In her ruling, Judge Cedarbaum granted a motion by Mrs. Stewart to block expert testimony on the “materiality” of Mrs. Stewart’s statements in 2002 about the ImClone investigation.

The ruling, issued before jurors were in the courtroom, blocks testimony on “whether a reasonable investor would have considered the statements important in making an investment decision,” the judge said.

The decision could still allow prosecutors to introduce stock charts to show Mrs. Stewart’s company’s stock rose after her statements. But it would leave to the jury to decide whether the statements led to the gains.

“I think it’s potentially very significant,” Stewart spokesman George Sard said. Asked whether Mrs. Stewart was pleased, he said: “I haven’t talked to her, but I think that’s a fair inference.”

Mrs. Stewart is accused of lying to investigators about why she dumped 3,928 shares of ImClone on Dec. 27, 2001 — just before it plunged on negative word about its experimental cancer drug.

Mrs. Stewart insists she and her broker, Peter Bacanovic, had worked out a deal to sell when the stock fell below $60 a share. But the government says Mr. Bacanovic, through an aide, alerted Mrs. Stewart that ImClone founder Sam Waksal was dumping his shares. Waksal is now serving a prison term.

ImClone shares tumbled after the government announced that it was rejecting the company’s application for approval of the cancer drug Erbitux. The Food and Drug Administration finally approved the drug Thursday, sending ImClone shares sharply higher in trading yesterday.

In front of jurors yesterday, Mrs. Stewart’s defense tried to call into question the accuracy of notes taken by an FBI agent at Mrs. Stewart’s two interviews with investigators, in February and April 2002.

Special Agent Catherine Farmer’s notes are the only record of the interviews, and Mrs. Stewart’s statements at the meetings form the basis for the government’s accusations that she lied.

Ms. Farmer took notes on the meetings, then typed routine summaries of them, called FBI 302 reports, based on her notes and memory.

In Mrs. Stewart’s interview on Feb. 4, 2002, Ms. Farmer’s 302 report shows Mrs. Stewart said she did not know whether there was a record at her office of a call from Mr. Bacanovic on the day she sold her ImClone stock.

Mrs. Stewart had altered the record of the Mr. Bacanovic call four days earlier, then quickly ordered it changed back, her assistant has testified.

But under questioning by Stewart attorney John Tigue, Ms. Farmer conceded the information in the 302 report — written immediately after the interview — came from her memory only and did not appear in her notes.

“It’s possible to miss important things, and you were brand new to the case, weren’t you?” Mr. Tigue asked the agent.

“Yes, the case was just assigned,” Ms. Farmer replied.

Prosecutor Karen Patton Seymour, trying to preserve the credibility of Ms. Farmer’s testimony, pointed out in questioning that the FBI always relies on notes in its voluntary interviews — never court reporters or tape recordings.

“Was Martha Stewart treated any differently than anyone else who submits to a voluntary interview?” Ms. Seymour asked Ms. Farmer.

“No,” the agent replied.

Judge Cedarbaum blocked prosecutors yesterday from putting into evidence a record of a phone call from Mr. Bacanovic to Mrs. Stewart on Jan. 31, 2002, just minutes after, according to testimony, she altered the message log.

The judge ruled the call proved nothing relevant — then criticized prosecutors.

“I hope at some point it’s going to become clearer to me what you’re really charging here,” she said outside the jury’s presence. “There are a lot of things in this indictment that I don’t know whether you are or are not charging.”

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