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Martha's Defense Rests -- and Hopes

By Kate Hazelwood The Martha Stewart trial could go to the jury next week in U.S. District Court in lower Manhattan. The defense rested on Feb. 25, with none of the long-anticipated fanfare. No high-pitched rebuttals of the prosecution's case. No drama of Stewart defending herself before the jurors. Lawyers for both the domestic doyenne and her ex-broker, Peter E. Bacanovic, chose not to put the defendants on the witness stand.

The only drama came as prosecutors tried to poke holes in the testimony of a short parade of defense witnesses, most of it intended to bolster a key defense contention: Stewart and Bacanovic had a standing agreement to sell her ImClone (IMCL) stock if the price fell below $60 a share.

Stewart and Bacanovic are charged with obstructing justice and for making false statements concerning her sale of 3,928 ImClone shares on December 27, 2001. In addition, Bacanovic faces charges of perjury and falsifying documents, while Stewart faces an additional securities fraud charge. (On Feb. 27, the securities fraud charge was thrown out by Judge Miriam Goldman Cedarbaum.)

The prosecution maintains that Stewart sold her shares only upon learning from Bacanovic's assistant Douglas Faneuil -- the prosecution's star witness -- that ImClone founder Sam Waksal, her friend, was selling his own shares. Then, Stewart and Bacanovic allegedly tried to mislead investigators about the transaction, while Stewart allegedly misled investors in her company, Martha Stewart Omnimedia (MSO), with her actions, the prosecution contends.

FUZZY MEMORY. While Bacanovic's defense lawyer presented several witnesses, Stewart's attorney, Robert G. Morvillo, offered only one, Steven Pearl, a former Wachtell Lipton attorney who accompanied Stewart to a February 4, 2002 interview with investigators. But Pearl's testimony seemed to raise more questions than it answered.

The prosecution maintains that Stewart lied when she told investigators she didn't know if Bacanovic had attempted to reach her to alert her that Waksal was selling his shares. Yet, Pearl testified he couldn't recall what she said during the interview with probers: "I have an incomplete recollection of some things," he said, as some jury members rolled their eyes.

The jurors sat up straight, however, when Assistant U.S. Attorney Karen Seymour displayed a copy of Pearl's handwritten notes from the meeting on an overhead projector screen, alongside his formal memorandum account of the same meeting. His handwritten notes had no reference to Stewart knowing or not knowing. Yet, his memo on the subject claimed she didn't know.

ALTERED TEXT? Why was it, Seymour asked, that Pearl's completed memo differed substantially from his handwritten notes? Because, Pearl replied, he was able to draw on his memory on the afternoon of, and the day following, the meeting, to round out the memo. Pearl said his role was to take notes to capture the substance of the meeting, rather than to spit out a verbatim transcript. Later, however, he raised the possibility of typos in the memorandum.

The prosecutor asked Pearl if the memorandum might have been altered in the two years since Pearl had left Wachtell Lipton. But Judge Cedarbaum shut down that line of questioning.

"My point today," Seymour said, "is that you have insufficient memory to say your notes are accurate or complete?"

"Yes," Pearl replied softly.

SOME DISMISSALS? If the defense lawyers were worried about the prosecution denting their case, they weren't showing it. In mounting such a muted defense and declining to put Stewart and Bacanovic on the stand, they appear to be betting that they can convince the jury that the prosecution hasn't proven the charges beyond a reasonable doubt.

Stewart looked relaxed as she huddled with Bacanovic after the lunch break, and Stewart's daughter Alexa giggled and bantered with Morvillo's son in the first row behind the defense.

Will their optimism hold? The next two days of proceedings will be closed to the media and the jury, as Judge Cedarbaum hears arguments from both sides on possible early dismissal of some of the charges and on crafting a final set of instructions to the jury for its deliberations.

After that come closing arguments, and then the jury will decide. Hazelwood is covering the trial for BusinessWeek Online

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