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Prosecutor: Stewart lied and cheated

The criminal case against Martha Stewart "is about lying to federal agents, it's about manufacturing evidence, and it's about cheating investors in the stock market," a federal prosecutor told a Manhattan jury as the multimillionaire businesswoman's trial got under way Tuesday.

Stewart sold her ImClone Systems Inc. stock Dec. 27, 2001, because she received an improper secret tip, Assistant U.S. Attorney Karen Patton Seymour said in her opening statement. Then Stewart and her stockbroker, Peter Bacanovic, concocted a false story to cover their tracks, Seymour said. "This case is about lies that no one in this country can tell without breaking the law."

But lawyers for Stewart, 62, and Bacanovic, 41, fought back immediately, proclaiming their clients' innocence and objecting to almost every government exhibit.

Rather than concocting a coverup, Stewart and Bacanovic were simply telling the truth when they told the Securities and Exchange Commission and federal prosecutors that Stewart had agreed earlier to sell the stock if the price fell to $60, as it did that day, the defense lawyers said.

"The government has rushed to judgment to bring a case against Martha Stewart, and in that rush they have charged an innocent man," Bacanovic's lawyer, Richard Strassberg, told a packed courtroom that included his client's parents as well as Stewart's mother, sister and daughter.

Stewart had no reason to believe she had received an improper tip about an ImClone sale worth $250,000 and no reason to lie about it to investigators, said her attorney, Robert Morvillo. She may have made "mistakes as to dates and details" in her statements to investigators, but the essence of her statements were truthful, he said.

Furthermore, Stewart and Bacanovic could not have conspired to come up with the $60 sell-price story because they did not talk to each other between the day of the transaction and Bacanovic's first interview with the SEC.

"We're not here asking for sympathy. We're not asking for favoritism. We don't want any special treatment," Morvillo said. "Decide this case based on what is fair and just."

After opening arguments, executives from ImClone and Merrill Lynch testified, providing background information on their companies. Prosecutors had the Merrill Lynch official describe his firm's policies requiring brokers to never share information about clients.

U.S. District Judge Miriam Goldman Cedarbaum postponed further testimony until Thursday because an expected winter storm might prevent jurors from getting to the courthouse. The trial is expected to continue into March.

The prosecution's case will turn on a witness expected to testify Thursday: Douglas Faneuil, who was Bacanovic's assistant at Merrill Lynch & Co.

Seymour told the jury Faneuil will testify that Bacanovic told him to tell Stewart that December day, in a violation of Merrill Lynch privacy rules, that ImClone's founder, Samuel Waksal, and his family were dumping their shares. Stewart sold her ImClone stock immediately, and the company announced the next day that its top cancer drug had been dealt a setback by the Food and Drug Administration. Waksal is serving a seven-year prison sentence for insider trading.

"Investors who didn't benefit from a secret tip like Martha Stewart lost millions of dollars," Seymour said.

But Morvillo told the eight women and four men on the jury that Stewart, who was standing on an airport taxiway in New Mexico, agreed to sell simply because "she's on her way on vacation. She doesn't want to talk about it anymore. . . . Would you have thought you couldn't have sold because (your broker) told you another customer was selling his stock?"

The two sides also exchanged sharp words over the most serious charge against Stewart: the allegation that she issued false public statements about her ImClone sales to prop up the stock of her company, Martha Stewart Living Omnimedia. "Investors rely on Martha Stewart's word, as the company's founder, not to mislead them," Seymour said.

But Morvillo called the charge "bizarre," and said Stewart was simply trying to counter false leaks from Capitol Hill in June 2001 that Waksal had tipped her about the FDA decision. Prosecutors have cited no evidence that Stewart and Waksal talked the day of their stock sales, although she did leave him a message at his office asking what was going on.

Bacanovic's lawyer took aim at Faneuil's credibility, saying that if the assistant told Stewart of the Waksal sales, he acted on his own. "He did it out of inexperience, he did it out of foolishness, but he did it on his own. Peter has been falsely accused," Strassberg said.

Strassberg had equally harsh words for the government's chief piece of forensic evidence, an ink analysis of a worksheet that Bacanovic says documented the plan to sell at $60. A government lab found that the notation "60" was in a different ink from the other handwritten marks on the page.

But Strassberg said "the tests were flawed because the government knew the answer it wanted before it started."

THE CHARGES AGAINST STEWART AND BACANOVIC

According to court documents, Martha Stewart and former stockbroker Peter Bacanovic are accused of:

Martha Stewart

+ Conspiracy: Stewart and Bacanovic "willfully and knowingly" worked together to obstruct justice and make false statements in the stock-trading scandal.

+ False statements: Among other things, Stewart lied when she told the Securities and Exchange Commission, FBI and federal prosecutors she had prearranged with Bacanovic to sell ImClone when it fell below $60 per share.

+ False statements: Among other things, Stewart lied when she told the SEC, FBI and prosecutors that she did not recall being told on Dec. 27, 2001, that the Waksal family was selling ImClone stock.

+ Obstruction of justice: From January to April 2002, Stewart "willfully and knowingly" tried to hamper the SEC investigation of her stock sale by providing misleading information.

+ Securities fraud: Stewart "well knew" her personal reputation was critical to shareholders in her company, Martha Stewart Living Omnimedia, yet she made misleading public statements in June 2002, after news of her ImClone sale broke, that she intended to "defraud and deceive" her investors.

Peter Bacanovic

+ Conspiracy: Stewart and Bacanovic "willfully and knowingly" worked together to obstruct justice and make false statements in the stock-trading scandal.

+ False statements: Bacanovic lied when he told regulators he had had a conversation with Stewart in which she decided to sell ImClone when it reached $60 per share. Also says he lied about a Dec. 27, 2001, conversation in which he told Stewart the stock price had dropped.

+ Making and using false documents: Bacanovic altered a worksheet of Stewart's portfolio to make it appear he and Stewart had prearranged to sell ImClone when it fell below $60.

+ Perjury: Bacanovic lied repeatedly in an interview Feb. 13, 2002, with SEC investigators, particularly about his conversations with Stewart in the weeks surrounding her sale of ImClone stock.

+ Obstruction of justice: Alleges that, from January to April 2002, Bacanovic "willfully and knowingly" tried to hamper the SEC investigation of Stewart's stock sale.

Penalties

The maximum penalty for each count is five years in prison and a $250,000 fine, except for the securities fraud count against Stewart, which carries 10 years in prison and a $1-million fine. If convicted, both are likely to get far lighter penalties than the maximum under federal sentencing guidelines.

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