Stewart Friend Wavers; U.S. Rests Its Case

The government rested its fraud and obstruction case against Martha Stewart on Friday, a day punctuated by an odd twist when a key witness partially retreated from her damaging testimony of a day earlier.

After three weeks of testimony, U.S. District Judge Miriam Goldman Cedarbaum said she would rule next week on defense motions to dismiss all or some of the charges against Stewart and her former stockbroker, Peter E. Bacanovic.

The two are accused of lying to federal investigators and cooking up a false story to conceal that Stewart had sold $228,000 worth of shares in ImClone Systems Inc. a day before bad news kayoed the stock. Stewart also is charged with securities fraud for allegedly misleading investors in her multimedia company by repeating her supposedly phony cover story.

On cross-examination Friday, Stewart’s longtime friend Mariana Pasternak acknowledged that she couldn’t be sure whether Stewart had made a remark that Pasternak attributed to her the day before.

Pasternak testified Thursday that while she and Stewart were vacationing in Baja California in late 2001, Stewart told her that Samuel D. Waksal, then chief executive of ImClone, was trying to unload his stock in the biotech firm. Stewart, according to Pasternak, also said she had sold her own ImClone shares. The conversation took place four days after Stewart’s stock trade.

The account hurt Stewart’s case because she told federal investigators in April 2002, that she couldn’t recall having heard about Waksal’s attempted sales.

But doubt crept in Friday over another potentially damaging remark that Pasternak attributed to Stewart: “Isn’t it nice to have brokers who tell you those things?”

Under questioning by Stewart’s chief lawyer, Robert G. Morvillo, Pasternak admitted: “I do not know if that statement was made by Martha or just was a thought in my mind.”

In response to a follow-up question from the prosecution, Pasternak said later that to the best of her recollection Stewart did make the comment.

Also Friday, two friends of star government witness Douglas Faneuil, Bacanovic’s former assistant at Merrill Lynch & Co., backed up Faneuil’s story that Bacanovic had ordered him to pass Stewart the tip that Waksal and his daughters were trying to sell their ImClone stock.

Zeva Bellel, a freelance beauty writer who lives in Paris but attended college with Faneuil, said she saw him at a party less than a week after Stewart’s stock sale. Faneuil, she said, was “very upset” because the Securities and Exchange Commission had contacted him about the ImClone trading. He told her essentially the same story then that he told on the witness stand two weeks ago.

The other friend, Eden Werring of New York, recalled seeing Faneuil in April 2002. He appeared “very stressed out” and told her that something bad had happened at work “and he had to lie for his boss,” Werring testified.

Before becoming a cooperating witness in June 2002, Faneuil lied twice to federal authorities about the ImClone sale, he testified. He said he did so in part because he felt intimidated by Bacanovic.

Cedarbaum indicated Friday that “a substantial portion” of the case almost certainly would survive defense challenges. Based on the judge’s grilling of lead prosecutor Karen Patton Seymour, however, Cedarbaum is skeptical of the fraud charge.

The trial is likely to go forward through at least the end of February, as first Bacanovic and then Stewart get the chance to call their own witnesses.

Defense lawyers remained noncommittal as to whether either of the defendants would take the stand.