Martha's Mystery Message

Martha Stewart altered a log of a phone message left by her stockbroker about ImClone Systems stock, then immediately ordered her assistant to change it back, the assistant testified Tuesday.

Stewart sat down at the assistant's desk and changed the message from "Peter Bacanovic thinks ImClone is going to start trading downward" to "Peter Bacanovic re Imclone," assistant Ann Armstrong testified.

The message referred to a call placed by Bacanovic, Stewart's broker and co-defendant, just before Stewart sold 3,928 shares of ImClone on Dec. 27, 2001.

Armstrong said Stewart altered the message on Jan. 31, 2002, just days before she was first interviewed by investigators about the ImClone trade.

Armstrong said Stewart quickly ordered her to restore the original message.

"She instantly stood up, still standing at my desk, and told me to put it back to the way it was," Armstrong said.

Armstrong told jurors she was "startled" by Stewart's conduct, and that Stewart had never before altered a message in the log, which Armstrong maintains at Martha Stewart Living Omnimedia, Stewart's media company.

The altered message is one of the government's most crucial pieces of evidence in the case.

The government alleges Stewart was tipped by Bacanovic that the family of ImClone founder Sam Waksal was trying to sell his shares on Dec. 27. She is charged with obstruction of justice and securities fraud, among other counts.

Stewart and the broker say they had a pre-existing deal to sell ImClone when it fell to $60 a share.

"What they're going to try to demonstrate is knowledge of guilt," Court TV's Catherine Crier told the CBS News Early Show. "Even though she changed it back it was obvious she was attempting to cover up the trail."

The defense must now decide if they want Stewart to take the stand, reports CBS News Correspondent Sharyn Alfonsi.

"The jury is going to want to hear from Martha," Crier said.

Prosecutors walked Armstrong through her memory of January and early February 2002 in hopes of convincing jurors Stewart was worried about the circumstances of her sale of ImClone.

They introduced a calendar entry showing Bacanovic scheduled a breakfast with Stewart on Jan. 16, 2002, about three weeks after the stock sale.

Stewart had met with or spoken to her lawyers on each of the three days before she changed the log, Armstrong said. Four days later, on Feb. 4, Stewart met with government investigators for the first time in the ImClone probe.

According to a federal indictment, Stewart claimed in that interview with investigators that she did not know whether Bacanovic's message from Dec. 27 had been recorded in Armstrong's message log.

Armstrong shut her computer down for the day, but retrieved the message's original wording in the days that followed. She printed a copy of the original wording and saved it in a manila envelope.

Under questioning from Stewart lawyer Robert Morvillo, who was trying to limit damage from the testimony, Armstrong said Stewart called her the night of Jan. 31 and asked her to keep trying to restore the original wording.

"Did she ever tell you not to try to restore it?" Morvillo asked.

"No," Armstrong answered.

At another point, Morvillo asked, "Did she ever ask you to lie or cover up this incident?"

"No," Armstrong replied.

On Monday, Armstrong, Stewart's assistant for six years, broke down while describing a phone conversation with her on the day of the stock sale.

Stewart was calling from Texas during a stop on her way to a vacation in Mexico. Armstrong said the two first chatted about the holidays.

"I thanked her for the plum pudding she sent home," Armstrong said — then began crying. Armstrong tried to continue, but the judge ended the trial 15 minutes early for the day.

Prosecutors called Armstrong to testify after the government's star witness — former Merrill Lynch & Co. assistant Douglas Faneuil, who handled the ImClone sale — finished his four days on the stand.

Faneuil has insisted that Bacanovic ordered him to tip Stewart about Waksal. He says he never knew of any pre-existing arrangement between Stewart and the broker to sell ImClone at $60.

On Monday, under questioning from Stewart lawyer Robert Morvillo, Faneuil said he did not believe he was doing anything wrong when he passed her the tip about the Waksal sale. Faneuil also testified Stewart never encouraged him to lie.

Alex Prudhomme wrote a book about the ImClone scandal, and believes Faneuil's testimony was eclipsed by the tears over plum pudding.

"It shows that Martha is not an ogre. She gives plum pudding to some of her assistants," Prudhomme said.

A Securities and Exchange Commission investigator, Helene Glotzer, was to testify later Tuesday about Stewart's initial interview.