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The prosecution of Martha Stewart cleared a major hurdle Tuesday, when a federal judge refused to dismiss a securities fraud charge brought after Stewart allegedly lied publicly about her role in the ImClone insider trading scandal. While acknowledging the count was “unquestionably a novel application of the securities laws,” Southern District of New York Judge Miriam Goldman Cedarbaum said the indictment properly alleged that Stewart made material misrepresentations in public statements about her sale of ImClone Systems Inc. shares in an effort to boost the share price of her own company, Martha Stewart Living Omnimedia (MSLO). The ruling was one of several that went the prosecution’s way Tuesday as Cedarbaum, relying on briefs and eschewing oral arguments, also rejected Stewart’s motion to dismiss an obstruction count from the indictment, refused to strike surplusage and other aspects of the indictment that the defense considered prejudicial, and denied the motion for a separate trial made by co-defendant Peter Bacanovic, Stewart’s former stock broker. Stewart and Bacanovic must now prepare for a January trial in which they are accused of conspiring to mislead investigators into her sale of nearly 4,000 shares of ImClone in December 2001. The sale was made almost simultaneously with the sale, or attempted sale, of large blocks of shares by Stewart’s friend and former ImClone CEO Samuel Waksal, who is now serving 7 years and 3 months in federal prison for insider trading. Stewart and Bacanovic are accused of concocting a story that Stewart had a prearranged stop-loss order to sell her ImClone stake if the price fell to $60. The public dissemination of that version of events, prosecutors Karen Patton Seymour and Michael S. Schachter allege, was designed to prop up the price of her company, MSLO, and, in fact, succeeded in doing so. Stewart’s attorneys Robert Morvillo and John J. Tigue had attacked the securities charge as an unprecedented and dangerous expansion of criminal liability under the securities laws. Morvillo and Tigue, of Morvillo Abramowitz Grand Iason & Silberberg, argued in their motions to dismiss that their client was being punished simply for claiming her sale of stock was innocent and unconnected to the Waksal sales. Cedarbaum did not buy their argument, saying the indictment “does not charge Ms. Stewart with lying by asserting her innocence.” And the judge found that the question of whether Stewart made material misrepresentations in connection with the purchase or sale of MSLO stock was one for the jury to decide. Similarly, the judge rejected Stewart’s argument that she was being punished for speaking freely, in violation of the First Amendment. “The Constitution does not prohibit the prosecution of lies that are part of a course of criminal conduct,” Cedarbaum said. The judge also disagreed with Stewart’s assertion in court papers that her due process rights were being violated because her statements related to “purely personal conduct.” Cedarbaum said Stewart’s arguments merely examine public statements about the ImClone sales and the subsequent investigation “in a vacuum.” SEPARATE TRIAL Bacanovic and his attorney, Richard M. Strassberg of Goodwin Proctor, had argued that the storm of publicity surrounding his co-defendant made it impossible to receive a fair trial, in part because there was a widespread public perception that Stewart was guilty. But Bacanovic, the judge said, was “essentially arguing” that Stewart herself could not receive a fair trial, and his bid for a solo trial must fail because the allegations against him are “inextricably intertwined” with those against his former client. Pressing ahead for the trial to begin on schedule, Cedarbaum told the attorneys that potential jurors will begin to fill out questionnaires on Jan. 8. The judge’s decision leaves the nine-count indictment against the pair intact. In addition to the securities fraud count, Stewart faces one count of conspiracy, one count of obstruction, and two counts of making false statements to investigators. Bacanovic faces counts of conspiracy, perjury, making false statements to investigators, submitting false documents and obstruction.

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