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updated 1/28/2004 11:37:11 AM ET 2004-01-28T16:37:11

The Martha Stewart case is a weird one any way you slice it.

Her defense asks the jury to question why a woman of such wealth would cheat or lie to prevent a mere $50,000 loss in her stake in ImClone. As her trial in a Manhattan federal court got underway yesterday, her lawyer Robert Morvillo pointed out that her roughly 4,000 shares of ImClone Systems represented much less than 1 percent of her net worth. Her sale of that stake for roughly $228,000 came just weeks before she would sell shares in her own company for $45 million.

But Morvillo and Richard Strassberg, lawyer for Stewart's broker and co-defendant Peter Bacanovic, propounded a defense that was at least as strange as the charge that the one-time billionaire went to so much trouble for fifty grand. Stewart, they said, was engaged in year-end tax selling, trying to find losses to offset her gain from the sale of 255,000 shares of Martha Stewart Living Omnimedia, booking a capital gain in the neighborhood of $5 million, depending on when in 2000 she sold her shares.

Selling her ImClone shares would provide little offset to the gain. In fact, if, as Morvillo said, she bought the shares in 1999, Stewart would have recorded a substantial gain from the sale. ImClone's share price never exceeded $22 in 1999 (adjusting for splits). If Stewart planned to sell at $60 (or $58.43, her actual sale price) she would not record a loss — so there would be no tax loss.

The case for the prosecution outlined by assistant U.S. attorney Karen Seymour was as expected. She said that Bacanovic tipped her off about Samuel Waksal, ImClone's then chief executive, and his family members trying to dump their shares in the company on Dec. 27, 2001, just before an announcement that the U.S. Food and Drug Administration was about to reject ImClone's application for the approval of its one viable product, the highly touted cancer drug Erbitux.

Bacanovic, on vacation in Florida, told his assistant at Merrill Lynch, Douglas Faneuil, to tell Stewart, on vacation in Mexico, about the Waksal machinations, and urged her to sell, too, Seymour said.

"The reason Martha Stewart dumped her shares is because she was told a secret. A secret tip that no other investors in ImClone had," Seymour argued. After that, Bacanovic — and later Stewart — lied to federal investigators about the reasons for the sale, she said.

Morvillo, however, added some new information to the mix. He said that Stewart's sale was part of a pattern. Earlier, she had sold 51,800 shares of ImClone that she held in her pension plan. She also sold just over 1,000 ImClone shares that she held in her brokerage account in response to a tender offer of ImClone by Bristol-Myers Squibb that fall. He said that Stewart and Bacanovic discussed year-end tax selling on Dec. 21, 2001, when Faneuil was on vacation — so the assistant didn't know the plan.

Morvillo said that Bacanovic contacted Stewart's office on Dec. 27, after he learned about the Waksals and left a message that ImClone was likely to be trading down, which Morvillo said was a "very responsible message" that did not betray client secrets, and which happened to coincide with her tax selling plans. As Bacanovic and Stewart had already discussed selling ImClone if it fell below $60 per share, Stewart's decision to sell after she got her broker's message made sense, Morvillo told the jury.

Video: Opening arguments in Stewart trial The case, the lawyer said, was purely circumstantial, and it was premised on "speculation, surmise and guesswork." He said the whole case was brought on by publicity caused by leaks made by Congressional investigators looking for headlines in an election year. "Same government, leaking on one end, prosecuting on the other," Morvillo remarked in the best line of the morning.

In this context, every aspect of the case — even the timing of Stewart's sale — was innocent, Morvillo said.

If there really was a tax loss, the defense would all make sense. If he could point to a prior stop-loss order, there'd be no case. But since there was no stop-loss order and Stewart was booking a gain, she has a problem. There is also the question of why Bacanovic's office would interrupt Stewart's holiday simply to save the centimillionaire a few thousand bucks on taxes.

If the opening statements were, as would be expected, a mixed bag, the start of testimony boded well for the defense. The government introduced Daniel Lynch, acting CEO of ImClone, to give the jury some background. But the case went off like a herd of turtles, with the government's efforts to introduce its first two exhibits leading to objections and lengthy conferences outside the hearing of the jury.

The prosecution wants to convince the jury that this case is not sour grapes, but it is "about the truth," as Seymour argued. If the trial gets bogged down in legal pettiness, if the jury gets bored, that's a tough sell. The U.S. attorney is off to a slow start. And today the trial will take its first day off as U.S. District Judge Miriam Cedarbaum read the weather report and declared it a snow day.

© 2012 Forbes.com

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