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Halftime in the Martha Case

With the prosecution having wrapped up its case against Martha Stewart, it's time to pause and look at the goods against America's most famous homemaker. In question and answer form, Associate Editor Diane Brady, who has been part of the BusinessWeek team following the trial, assesses the state of the Martha saga on the eve of her defense springing into action.

Did the prosecution lay out a convincing case that she lied and covered up?

Of course, the jury will have final say on that one. But the prosecutors certainly presented compelling evidence that something is fishy about the explanation provided by Stewart and her former broker, Peter Bacanovic, following her ImClone (IMCL) stock sale in late 2001.

There were those changed -- albeit briefly -- phone records, contradictions on tape, worksheets altered with different ink, and witnesses who generally seemed highly believable -- more so than the defendants are likely to appear.

Most important, Stewart's high-powered attorneys did little to undermine the credibility of the pot-smoking, r?sum?-fudging Douglas Faneuil. He's the former Merrill Lynch assistant who handled Stewart's ImClone sale a day before bad news sent the price tumbling and who also disputes the existence of a $60 sell agreement. Sure, Faneuil changed his story, zipped off snippy e-mails about Stewart to his lover, and clearly felt abused by his boss's celebrity client, but most observers felt he was strong on the stand.

Why would the guy lie? To Cleveland securities lawyer Charna E. Sherman, who kept a close eye on the case, "the prosecution has made extraordinary strides in putting to a jury that these two defendants lied and covered up."

What about the securities fraud charge?

Even U.S. District Judge Miriam Goldman Cedarbaum called that one "novel" when refusing to dismiss the charge in November. And she dealt the government a huge blow by refusing to let it bring in so-called expert witnesses to explain how Stewart's statements were aimed at appeasing investors and propping up her own company's share price (Martha Stewart Living MSO). That means it will come down to common sense on the part of the jury.

Was Stewart trying to protect her company's reputation, as well as her own, by issuing statements amid the investigation into her stock trade? Probably. Is that tantamount to tricking investors into buying the stock? The average person might not think so. Stewart lawyer Robert Morvillo has even moved again to have the charges dismissed based on the prosecution case presented this week.

What does the defense have to do now that it's about to start presenting its case?

First, it needs to present compelling arguments that a prior sell agreement actually existed. So far, the evidence strongly suggests otherwise. ImClone's stock price had dropped below $60 three times in the months before Stewart sold her shares, and most securities experts say that verbal sell agreements are extremely rare. If there were a sell order, it would be written down and disseminated to Bacanovic's team, experts point out. Otherwise, how would an innocent assistant like, say, Faneuil ever know to sell when the boss is out of town on vacation?

Second, the defense lawyers need to tread carefully around the "small potatoes" aspect of the case. It's one thing to tacitly suggest that these alleged "crimes" are hardly worth pursuing -- especially since the defendants have not been charged with the insider trading for which they were being investigated. But it's unlikely her lawyers will convince a jury that multimillionaire Stewart wouldn't really think about a trade that netted her less than $50,000 in allegedly ill-gotten gains.

True, Cedarbaum prevented prosecutors from presenting evidence that Stewart haggled with her company's chief financial officer over being reimbursed for haircuts. Then again, Stewart is a woman who sweats over the details of deer fencing and barbequed turkey. Don't tell us she wouldn't care.

Will either Stewart or Bacanovic take the stand?

Stewart's lawyer has suggested that she might, in part to discuss her general business practices. But, if the defense's case proves to be as weak as it now seems, putting the defendants on the stand may be risky. On cross-examination, inconsistencies will once again be exposed and laid bare for the jury.

Has public sentiment been swayed by the proceedings?

For this one, we went to a street corner in Midtown Manhattan for a random survey of pedestrians. Children's book editor Erin Molta has read the tabloid headlines but still wishes they would "just leave [Stewart] alone. She didn't need the money." Executive Dianne Allen feels Stewart is guilty, "but I thought that before the trial even started." That said, Allen adds, "I don't think she should receive any punishment that's greater than all those other weasels who have been involved in corporate scandals."

Teacher Elliot Stein is one of the few who has marveled at the revelations coming out of the trial. "I had no idea she was so rude and high-handed with people," he says. "At first, I thought this whole thing was nothing. But it's clear to me that she has no regard for anyone but herself. I hope they find her guilty."

Are jury members likely to be similarly moved?

Luckily, the jurors have a lot more fodder than tabloid headlines. Their views of Stewart could certainly factor into their decisions, but jurors tend to take their jobs seriously. If the evidence is overwhelming that the defendants lied, conspired, and/or obstructed justice, then the jury would be hard pressed to deliver a verdict of not guilty. But the defendants' side of the case is about to unfold. By the end, the prosecution could well be scrambling to reinforce its side.

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