Ruling Helps Stewart by Barring Testimony

In a win for Martha Stewart, the judge in her federal trial barred expert testimony about whether her public proclamations of innocence would have been important to investors in her media company.

The ruling by U.S. District Judge Miriam Goldman Cedarbaum makes it tougher for the government to prove the most serious charge against Stewart: that she committed securities fraud when she denied wrongdoing in her 2001 sale of ImClone Systems Inc. stock. The fraud charge carries a 10-year prison term. The other four charges against Stewart, including lying to investigators and obstructing justice, carry five-year terms.

Prosecutors had planned to call Wall Street analysts to the stand to testify that Stewart’s denials would have weighed heavily with investors in her public company, Martha Stewart Living Omnimedia Inc.

Cedarbaum is “trying to kill this count,” Fordham University law professor James Cohen said. “She thinks it’s overreaching by the government, and she’s doing her best to kill it.”

Cedarbaum rejected a defense motion to dismiss the charge before trial, but she was skeptical, calling it “a novel application of the securities laws.”

But New York securities lawyer Jacob H. Zamansky said the government didn’t need experts to make the case that investors would have been strongly influenced by the words of a chief executive, especially when the company’s fortunes are tied so closely to the image of that CEO.

Also Friday, the defense attacked the government’s contention that Stewart lied in two interviews with federal authorities, noting that the only government record of the meetings was an FBI agent’s handwritten notes and that the notes sometimes differ with reports she later typed up as summaries.

Under questioning by Stewart lawyer John J. Tigue Jr., FBI special agent Catherine M. Farmer acknowledged that it was “possible to miss important things” without a tape recorder or court reporter present.

The prosecution’s momentum was slowed in other ways Friday.

Government lawyers had hoped to send the jury home for the long holiday weekend with the image of charts outlining telephone traffic surrounding key events in the alleged conspiracy between Stewart and co-defendant Peter Bacanovic, her former stockbroker. But Cedarbaum frustrated that plan, sustaining defense objections that the charts and phone records underlying them would unfairly invite the jury to speculate about what was said in the phone calls.

Most of the sparring came with the jury absent from the courtroom.

She also told prosecutors: “I hope at some point it is going to be clearer to me what you are really charging, frankly, because there are a lot of things in this indictment which I don’t know whether you are or you are not charging.”

Cedarbaum directed the prosecution and defense to huddle over the weekend and try to agree on which calls should be accepted as evidence.

The judge then dismissed the jury of eight women and four men about 90 minutes early.

Separately, Kmart Holding Corp. is seeking to reduce its payments to Martha Stewart Living Omnimedia Inc. by as much as $6.5 million because of lower sales of Stewart’s housewares at the discounter’s stores.

Kmart wants to cut its royalty payments to $47.5 million from $52 million for the fiscal year ended Jan. 31, Martha Stewart Living said in a statement. The retailer also wants to cut as much as $2 million from its advertising in Martha Stewart Living magazines and TV programs.

Martha Stewart Living fell 12 cents to $11.68 on the New York Stock Exchange. Kmart fell 97 cents to $28.73 on Nasdaq.