A federal judge Tuesday further limited the government's ability to prove Martha Stewart and her stockbroker conspired to lie about Stewart's sale of ImClone Systems stock.
The judge blocked prosecutors from putting into evidence a voice mail broker Peter Bacanovic left for Stewart on Feb. 4, 2002, the day she was first interviewed by the government in the ImClone investigation.
"The fact that he tried to contact her really isn't evidence of anything, other than that they talked to each other sometimes," U.S. District Judge Miriam Goldman Cedarbaum said.
The essence of the conspiracy charge is that Stewart and Bacanovic worked together to hatch a cover story for why Stewart sold 3,928 shares of ImClone Systems stock on Dec. 27, 2001.
The government claims Bacanovic ordered his assistant to tip Stewart that ImClone founder Sam Waksal was trying to sell his shares. Stewart and the broker say they had arranged days earlier to sell ImClone at a fixed price.
Prosecutor Karen Patton Seymour argued the voice mail placed just after 7 a.m. on Feb. 4, 2002, is evidence of Bacanovic's state of mind in the alleged conspiracy. Stewart gave the first of two interviews to investigators later that day.
In a boost for the government, the judge said she would allow friends of star witness Douglas Faneuil to testify about what he told them in early 2002, months before he began cooperating with the government.
Faneuil has testified Bacanovic ordered him to tip Stewart about the Waksal sales, then pressured him to cover up the truth. Faneuil initially backed up Bacanovic, then agreed in June 2002 to testify against Bacanovic and Stewart.
Cedarbaum said she would allow evidence that Faneuil apparently told friends in early 2002 that he had been asked to do something wrong. She noted the statements were apparently made when Faneuil "had no belief that he had a need to curry favor with the government."
The judge also limited what prosecutors can argue about two other calls between Stewart and Bacanovic on Jan. 25, 2002, the day Stewart was informed that federal prosecutors wanted to speak with her.
Cedarbaum said those calls can only be used to show the pair spoke with each other.
On Friday, the judge barred prosecutors from putting into evidence a record of a phone call from Bacanovic to Stewart on Jan. 31, 2002, just after, according to testimony, Stewart changed a message log of a Dec. 27 Bacanovic call.
Stewart immediately told her assistant to change the message back to its original wording, testimony showed.
The new setbacks to the government came on the heels of a Friday ruling that blocks prosecutors from calling stock analysts as they try to show Stewart committed securities fraud.
That charge accuses the domestic maven of propping up the stock price of her own company, Martha Stewart Living Omnimedia, by falsely claiming she was innocent and cooperating with investigators in the ImClone probe.
Securities fraud, carrying up to a 10-year prison term, is the most serious of the five counts against Stewart. The other four — conspiracy, obstruction of justice and two counts of making false statements — carry five years apiece.
With the government close to resting its case against Martha Stewart, lawyers planning her defense are faced with an excruciating decision: Should they put her on the witness stand?
Attorneys not involved in the stock-fraud trial say having Stewart testify and opening her to cross-examination would be an enormous gamble, and her chief lawyer says he won't decide until he sees the government's full case. Prosecutors expect to rest Thursday.
But prosecution witnesses have exposed inconsistencies in the accounts of Stewart and her ex-stockbroker and have testified to behavior that only Stewart may be able to explain by testifying herself.
CBSNews.com Legal Analyst Andrew Cohen wouldn't be surprised if that decision comes only at the last minute.
"The lawyers have to figure out whether the upside to her testimony— her ability to convince jurors that she wasn't doing anything illegal — outweighs the downside that would come from a tough cross-examination," he said.
As the fourth week of testimony in Stewart's and Bacanovic's trial began in Manhattan federal court, prosecutors and an FBI special agent walked through a step-by-step, full-color graphic on a projection screen that showed ImClone-related phone calls on Dec. 27, 2001.
Those calls included some from Waksal's daughters and his accountant, all wanting to sell ImClone shares. Waksal later admitted advance knowledge of the negative government report that would soon send the stock on a sharp decline.
But Cedarbaum ordered the government to black out references in the chart to ImClone's falling stock price on Dec. 27, and to e-mails sent the same day.
The judge said prosecutors could tie all the information together as part of their closing argument — but not in a single piece of evidence.
Tuesday afternoon, prosecutors put into evidence dozens of records from a system Bacanovic used to log call and meetings he had with clients at Merrill Lynch & Co.
The records contained notes of discussions Bacanovic and Stewart had in late 2001, but no reference to ImClone between Oct. 26 and Dec. 26. Prosecutors were apparently introducing the records to shoot down Bacanovic's insistence he and Stewart agreed to sell ImClone when the price fell to $60 per share.
Prosecutors said last week they intend to rest their case Thursday. The defense is likely to take several weeks, meaning the case should go to jurors in March.