Three days after dumping her ImClone Systems stock, Martha Stewart confided to a longtime friend that she knew ImClone CEO Sam Waksal had tried to sell his own shares, the friend testified Thursday.
The testimony by Mariana Pasternak was perhaps the most damaging yet against the homemaking mogul, who told investigators three months later she had no memory of being tipped about Waksal.
Pasternak, a friend of Stewart for more than 20 years, said she had the conversation with Stewart on Dec. 30, 2001, on a terrace at a Mexican resort where they were vacationing.
"I remember Martha saying Sam was walking funny at the Christmas party, that he was selling or trying to sell his stock, that his daughter was selling or trying to sell her stock," Pasternak testified.
She said Stewart added: "Isn't it nice to have brokers who tell you those things?"
Stewart and broker Peter Bacanovic are accused of lying to investigators about why Stewart dumped her 3,928 shares of ImClone -- just before the stock sank on a negative government review of an ImClone cancer drug.
While Stewart is not charged with knowing about the review, she told investigators in 2002 she did not recall being told anything about Waksal trying to sell.
Waksal, a friend of both Stewart and Pasternak, is serving a seven-year prison sentence for insider trading. He and his family frantically sold, or tried to sell, their shares ahead of the drug announcement.
Stewart and Bacanovic claim they had made a deal earlier in December 2001 to dump Stewart's ImClone shares if the stock fell below $60. Prosecutors say that was a cover story.
Pasternak, a real estate agent who like Stewart lives in Westport, Conn., said she and Stewart had been friends for more than 20 years, spoke by phone every day and had traveled together to Peru and the Galapagos Islands.
The pair were staying at Las Ventanas, a luxurious resort in Los Cabos, Mexico. Prosecutors displayed records showing the two ran up tens of thousands of dollars in bills for spa treatments, individual meals and other services.
Pasternak was flying on a private plane with Stewart on the day Stewart sold her stock, and testified Stewart had "a raised tone of voice" on the telephone at a refueling stop in Texas.
It was on a call from the refueling stop that Stewart sold her stock.
Prosecutors, who plan to rest their case Friday, have amassed damaging testimony against Stewart and Bacanovic.
Douglas Faneuil, a former Merrill Lynch & Co. assistant, testified that Bacanovic ordered him on Dec. 27, 2001, to alert Stewart that the Waksals were trying to sell -- then pressured him to cover it up.
Ann Armstrong, a personal assistant to Stewart, testified Stewart herself altered a computer log of a message Bacanovic left on Dec. 27, then quickly ordered her to change it back.
The government has also laid out differences in the stories Bacanovic and Stewart told federal investigators. Stewart, for example, initially claimed she spoke to Bacanovic on Dec. 27, rather than his assistant.
Earlier Thursday, a Secret Service forensics expert testified that a notation of "(at)60" on a worksheet Bacanovic used to track Stewart's portfolio had been made in a different ink than other marks on the sheet.
Larry Stewart, considered the nation's top ink expert, said infrared and ultraviolet light tests had confirmed differences between the "(at)60" entry and other marks.
"The '(at)60' entry is a different ink than the remaining entries on the document," said the forensic scientist, who is no relation to Martha Stewart.
The worksheet, among the most critical pieces of government evidence in the trial, is a summary of gains and losses in 36 stocks Stewart owned in late 2001 at Merrill Lynch.
Bacanovic made circles, check marks and other notations in blue ink on the document. The "(at)60" mark, also in blue ink, is underlined and appears next to an entry for Stewart's 3,928 shares of ImClone.
Under cross-examination, the ink expert said it was impossible to tell how many pens had been used to mark on the document. Bacanovic's team contends he simply used different pens in his work.
Larry Stewart also admitted a dash mark next to an entry on the worksheet for Apple Computer could have been made in the same ink as the "(at)60" mark -- but also could have been in hundreds of other kinds of ink.
He said the government did not conduct full tests on the dash in part because it was marked over with yellow highlighter, contaminating some of the sample.
Stewart is charged with five criminal counts that carry a maximum prison term of 30 years. Bacanovic is charged with five counts carrying 25 years. Federal guidelines routinely reduce sentences to far less than the maximum.
Stewart is accused of securities fraud -- misleading investors in her own company, Martha Stewart Living Omnimedia, by claiming in 2002 that she was innocent and telling the public about the $60 agreement.
Lawyers for both Stewart and Bacanovic will have a chance Friday to cross-examine Pasternak.
Outside the jury's presence Thursday, U.S. District Judge Miriam Goldman Cedarbaum blocked the government from showing jurors that Stewart haggled over reimbursements from her company for haircuts and other minor expenses.
Prosecutors wanted to raise the issue to head off assertions by Morvillo that the homestyle guru would not have focused closely on her sale of ImClone Systems stock.
That sale netted less than $250,000 for Stewart, who once was worth $1 billion.