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At the close of the prosecution’s case against Martha Stewart, the trial judge expressed doubt that prosecutors produced enough evidence that Stewart intended to commit securities fraud by lying to investors in her own company about her role in the ImClone Systems Inc. insider trading scandal. Southern District Judge Miriam Goldman Cedarbaum on Friday repeatedly asked prosecutor Karen Patton Seymour what evidence supported the claim that Stewart sought to defraud investors in Martha Stewart Living Omnimedia when Stewart issued allegedly false public statements and releases protesting her innocence in June 2002. The statements came at a time when the public scrutiny of her sale of 3,928 shares ImClone on Dec. 27, 2001, was reaching a fever pitch. Cedarbaum called the securities fraud charge “the most problematic” of the counts facing Stewart and her co-defendant, broker Peter Bacanovic. Stewart is also accused of two counts of making false statements to investigators, obstruction of justice and conspiracy. The first of the statements was made by Wachtell, Lipton, Rosen & Katz attorney John Savarese to The Wall Street Journal, and appeared in the newspaper on June 7, 2002. The statement said in part, “The sale was executed because Stewart had a predetermined price at which she planned to sell the stock.” The second was a statement on June 12, after ImClone founder Waksal had been arrested for insider trading. It discussed her plans to sell the stock with Bacanovic “several weeks” in advance of the actual sales. In that statement, she said that on Dec. 27, “I returned a call from by broker advising me that ImClone had fallen below $60 � and reiterated my instructions to sell the shares.” The indictment also states that Stewart “falsely stated she ‘did not have any nonpublic information regarding ImClone’” when she sold her shares. A June 18 statement, drafted with the help of former MSLO General Counsel Gregory R. Blatt, said Stewart’s stock sale “was based on information that was available to the public that day,” a statement she repeated in person at an analyst and investor conference the following day. In that statement, Stewart denied being tipped by ImClone founder Samuel Waksal about the information that led Waksal’s family to unload millions of dollars in shares on Dec. 27. That information was that the application for the company’s anti-cancer drug, Erbitux, had been rejected by federal regulators. Seymour said Stewart’s intent to defraud investors could be inferred from the circumstances: MSLO stock was dropping, Stewart stood to personally lose $30 million for every dollar it dropped, and she knew that reassuring investors that she was both cooperating with the government and had a legitimate motive for selling the stock was designed to prop up the share price. It was at that analyst conference, Seymour said, that Stewart “drew the link” between her own conduct in the ImClone affair and the price of MSLO. Seymour also said the jury should be allowed to dissect Stewart’s statements when considering the securities fraud charge and separate, for itself, the “innocent” motive of repairing her damaged public image from the “illegal” motive of lying to boost the stock. “But we are talking about a criminal case,” Cedarbaum responded. “I would like you to give me a criminal securities fraud case in which there was an innocent purpose and a guilty purpose and the jury was allowed to decide which was the purpose.” MATERIALITY ELEMENT With Cedarbaum focusing on intent, defense attorney Robert Morvillo of Morvillo, Abramowitz Grand, Iason & Silberberg chose to challenge the judge on another element needed for a verdict of guilty on the securities fraud charge: materiality. Cedarbaum said she felt the prosecution had produced enough evidence to show that Stewart’s public statements were important to investors in deciding whether to purchase or sell the stock. “The fact that the price of the stock went down is sufficient evidence that there was a sufficient relationship between Ms. Stewart’s criminal problems and the value of the stock,” the judge said. Not so, said Morvillo, who called, for purposes of argument, the “$60 dollar agreement” a “subsidiary” lie to the real issue concerning investors and the one on which Stewart told the truth: that she was not tipped to ImClone’s pending bad news by Sam Waksal. Morvillo drew the following analogy: Say Stewart was accused of robbing a bank, and she gave a public statement that she had not robbed the bank, because she was in Peoria when it happened. If, Morvillo said, she was actually in Cincinnati during the bank robbery having an affair she wanted to keep secret, then her lie about Peoria was irrelevant and “subsidiary” to the truth she told about not robbing the bank. Cedarbaum said Morvillo was “slicing the onion pretty thin” with that argument, but Morvillo said it went right to the heart of materiality on the issue that concerned investors the most. And it was only the following week, Morvillo said, that key witness Douglas Faneuil came forward to begin cooperation talks with the government and undermine Stewart and Bacanovic’s story about the $60 agreement, after which Ms. Stewart made no public statements on the agreement. Morvillo also said Stewart’s statement at the analyst conference was not intended to stop the bleeding in MSLO stock, but was instead aimed at rescuing a business jeopardized by the investigation, as advertisers and business partners were questioning whether the scandal would hurt the viability of MSLO. Blatt, Morvillo reminded the judge, had testified to the effect that “it was the health of the business that was going to tumble until this crisis was resolved.” Cedarbaum heard more arguments about the sufficiency of the evidence presented by both sides on other counts in the indictment, asked for written submissions and said she would hear oral arguments on Monday. The government rested its case on Friday after three weeks of testimony by a total of 21 witnesses. Also on Friday, Stewart’s longtime friend Mariana Pasternak had her credibility undermined on cross-examination about a critical statement Pasternak made the previous day. Pasternak had hurt the defense case on Thursday by relating that while on vacation in Mexico, Stewart had told her the Waksals were selling their shares and she had sold hers. Pasternak said Thursday that Stewart also said, “Isn’t it nice to have brokers who tell you those things?” But on Friday, Pasternak conceded, “It is fair to say I do not know if that statement was made by Martha or if that was just a thought in my mind.” Prosecutor Michael Schachter worked to restore his witnesses’ credibility, eliciting from Pasternak that it was her best belief “that Martha said it.” – The Associated Press contributed to this report.

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