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Judge Reins In Martha Prosecutors

A federal judge dealt a blow Friday to the government's effort to prove Martha Stewart committed securities fraud, the most serious count against the homemaking entrepreneur.

U.S. District Judge Miriam Goldman Cedarbaum blocked any expert testimony on whether investors would have considered Stewart's public statements about her ImClone Systems sale important.

The securities fraud count accuses Stewart of propping up the stock price of her own company, Martha Stewart Living Omnimedia, by claiming in 2002 that her ImClone sale was proper and that she was cooperating with authorities.

Conviction on the securities fraud count carries a 10-year prison term. Each of the other four counts against Stewart carries five years. Cedarbaum granted a motion by Stewart to block expert testimony on the "materiality" of Stewart's statements in 2002.

Meanwhile, Kmart Corp. is trying to cut its payments to Martha Stewart's company for the exclusive rights to sell its housewares and other products.

Martha Stewart Living Omnimedia Inc. said Friday that Kmart's interpretation of their contract would cut what it gets from Kmart by millions of dollars and said it would contest Kmart's filing.

In a complaint filed Wednesday in U.S. Bankruptcy Court in Chicago against a subsidiary of Martha Stewart Living Omnimedia, Kmart said Martha Stewart Living has sought more in royalties from the retailer than their contract calls for.

Kmart, which emerged from bankruptcy in May, has stood by the Martha Stewart Everyday line, touting the brand as one of its main assets despite the legal troubles of the domestic style maven behind the name.

Friday's court ruling in the securities case blocks testimony on "whether a reasonable investor would have considered the statements important in making an investment decision," the judge said.

Cedarbaum ruled as the 10th day of testimony got under way at the trial of Stewart and ex-stockbroker Peter Bacanovic.

They are accused of lying to investigators about why Stewart sold 3,928 shares of ImClone on Dec. 27, 2001.

The pair claim they had a pre-existing understanding to sell the stock when it fell to $60 per share. But the government says Stewart was tipped that ImClone CEO Sam Waksal was trying to dump his own shares.

ImClone shares tumbled after the government announced the next day that it was rejecting the company's application for approval of the cancer drug Erbitux.

The Food and Drug Administration finally approved the drug Thursday, sending ImClone shares sharply higher in early Friday trading.

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