A federal judge dealt a blow Friday to the government's effort to prove Martha Stewart committed securities fraud when she publicly proclaimed her innocence amid an investigation of a stock sale.
U.S. District Judge Miriam Goldman Cedarbaum blocked any expert testimony on whether investors in 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 Stewart -- accuses Stewart 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 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, Cedarbaum granted a motion by Stewart to block expert testimony on the "materiality" of 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.
Prosecutors will thus be blocked from introducing stock research reports or from calling stock analysts as witnesses to testify to the effect Stewart's statements had on the stock price, according to the Stewart defense.
The decision could still allow prosecutors to introduce stock charts to show 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 Stewart was pleased, he said: "I haven't talked to her, but I think that's a fair inference."
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 news about its experimental cancer drug.
Stewart claims she and her broker, Peter Bacanovic, had worked out a deal to sell when the stock fell below $60. But the government says Bacanovic, through an aide, alerted Stewart that ImClone founder Sam Waksal was dumping his shares.
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 Friday trading.
In front of jurors Friday, Stewart's defense tried to call into question the accuracy of notes taken by an FBI agent at 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 Stewart's statements at the meetings form the basis for the government's accusations that she lied.
Farmer took notes on the meetings, then typed routine summaries of them, called FBI 302 reports, based on her notes and memory.
In Stewart's interview on Feb. 4, 2002, Farmer's 302 report shows Stewart claimed she did not know whether there was a record at her office of a call from Bacanovic on the day she sold her ImClone stock.
Stewart had altered the record of the Bacanovic call four days earlier, then quickly ordered it changed back, her assistant has testified.
But under questioning from Stewart lawyer John Tigue, 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?" Tigue asked the agent.
"Yes, the case was just assigned," Farmer replied.
Prosecutor Karen Patton Seymour, trying to preserve the credibility of 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?" Seymour asked Farmer.
"No," the agent replied.
Cedarbaum blocked prosecutors Friday from putting into evidence a record of a phone call from Bacanovic to 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."