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Martha Stewart told a traveling companion on Dec. 30, 2001, that she knew about the frantic efforts of Sam Waksal, then CEO of

ImClone Systems

, to unload his company shares earlier that month, according to testimony Thursday in her criminal obstruction trial.

Mariana Pasternak, who accompanied Stewart on a trip to Mexico, testified in federal court in Manhattan that Stewart said she knew Waksal "was trying to sell his stock, that his daughter was trying to sell her stock, that Merrill Lynch refused to sell."

The account casts more doubt on Stewart's claim to have sold her 4,000 shares under an informal stop-loss agreement with her broker.

Merrill Lynch refused to allow Waksal to transfer his personal ImClone shares into his daughter's account on Dec. 27, 2001, the same day Stewart made her now-famous ImClone trade. The government claims Stewart and her Merrill broker, Peter Bacanovic, knew about Waksal's actions but lied about why Stewart sold her shares one day before a regulatory setback gutted the stock.

"She said, 'His stock is going down and I sold mine,'" Pasternak said.

Testifying about a conversation that she claims occurred with Stewart on the balcony of a Mexican resort on Dec. 30, Pasternak also said Stewart enthusiastically praised Bacanovic, who prosecutors think ordered an assistant to tip Stewart to sales by Waksal's family.

"She said, 'Isn't it nice to have a broker who tells you these things?'" testified Pasternak, the Westport, Conn., real estate agent with whom Stewart vacationed.

Pasternak's testimony is the most explicit evidence that jurors have heard about what Stewart knew, buttressing the account given earlier in the trial by Bacanovic aide Douglas Faneuil. It could increase the pressure on her defense team to put Stewart on the stand, a prospect that was broached earlier Thursday by defense attorney Robert Morvillo.

"Should Miss Stewart testify on behalf of the defense, I think the defense will be fairly broad-based," Morvillo said.

Stewart and Bacanovic face up to five years in prison if convicted of obstructing justice with their story that the ImClone shares were sold under an informal stop-loss agreement that kicked in when the stock fell below $60. Stewart is also accused of securities fraud, which carries a potential 10-year sentence, on grounds that her claims of innocence were a plot to prop up the stock of

Martha Stewart Living Omnimedia


, the company she founded.

Pasternak's stunning remarks perked up a jury and courtroom that had been lulled by hours of testimony from the government's ink expert, Larry Stewart. With an official title of "National Expert On Ink," Larry Stewart is the lab director for the U.S. Secret Service and often handles counterfeiting and document forgery cases for the government.

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In today's proceedings, Larry Stewart -- no relation to Martha -- was brought in by the prosecution to discuss changes allegedly made in pen by Bacanovic on an unrealized loss/gain worksheet for Martha Stewart's account.

The worksheet was originally printed on Dec. 21, 2001. However, the government contends that Bacanovic added the instructions "@60" after the ImClone line item at a later date to support his story that he and his client Martha Stewart had a stop-loss order to sell the shares if the stock dipped below $60.

The government's expert witness showed the jury infrared photographs of the worksheet which clearly differentiated the "@60" marking from other ink marks on the page. Larry Stewart also said that the ink used to make the "@60" notation did not match the other ink used on the page, which came from "a Papermate stick pen," nor did it match any ink in the government's 8,500-sample ink collection.

Most importantly to both sides, Larry Stewart admitted he could not confirm the date the "@60" notation was placed on the page.

Government attorneys took less than a half-hour to cross-examine their ink expert, while Bacanovic's attorney, Richard Strassberg, grilled the government's expert witness in a legal version of a filibuster lasting more than two hours.

Strassberg pored over Larry Stewart's findings from his tests on the document last summer, as well as his retesting of the same document in January 2004. Strassberg especially dwelled on a "dash" next to a $13,203 unrealized loss on Stewart's

Apple Computer

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shares that Larry Stewart did not test, and which had the same reaction to the infrared light test as the ink from the "@60" ImClone notation.

The government also called Morgan Stanley investment banker David Topper to testify on the subject of Martha Stewart's Wall Street acumen. Topper was part of the Morgan Stanley investment banking team that helped Stewart's company become public in the fall of 1999.

Topper told the jury that Stewart took charge when it came to planning the road show and the syndicate allocation of shares of MSO prior to the company going public. Topper also said that Stewart often made mention of the fact that she had been a stockbroker before she was a media entrepreneur.

Topper recounted a story in which Stewart expressed displeasure at one of her senior executives who wanted to sell her insider shares soon after the initial public offering. Stewart said it was too close to the IPO for an insider to sell and was worried about the signals it might send to the market.

Topper's testimony lent credence to the government's case that Stewart's background made her well-acquainted with Wall Street rules that encompass improper trading, as well as the important market signals related to insider sales.

By presenting these facts, the government is making it difficult for Stewart to argue she didn't realize the implication of unloading her ImClone shares after hearing about the insider sales of Waksal, the former CEO who is now serving jail time.

Stewart's lawyers did make some progress earlier in the day. The government's efforts to paint Stewart as cheap ran into trouble when the judge barred testimony about a $17,000 limousine bill.

Judge Miriam Goldman Cedarbaum barred testimony from Martha Stewart Living Financial Chief James Follo that prosecutors said would show that Stewart, who had a reputation for micromanagement, had a liberal interpretation of expense reports.

Before Cedarbaum's ruling, Follo told the courtroom about Stewart's $17,000 bill for weekend limousine charges between spring 2001 and spring 2002 -- and about his concerns that some of the trips were personal antiques expeditions. Follo also said he raised questions with Stewart about whether her $200 haircuts really were just for television.

Cedarbaum rejected the government's line of questioning as excessive, saying, "I think it's an elephant bringing forth a mouse." A consequence of the ruling could be to limit the ability of defense attorneys to persuade jurors Stewart was too busy with a $45 million Martha Stewart Living stock sale to worry about the 4,000-share trade at the center of her criminal case.

Prosecutors had planned to use Follo as part of a larger strategy to refute the defense's claim that Stewart is too rich to care about the relatively small amount of money involved in her ImClone transaction. The thesis pertains both to her obstruction charges and to the securities fraud count, in which prosecutors contend Stewart's frequent claims of innocence amounted to a plot to prop up her own company's stock.

Morvillo is expected to try to get the fraud count thrown out when the prosecution's case is finished, possibly this week. The allegation suffered what many thought was a fatal blow last week when Cedarbaum barred the testimony of expert witnesses who would have said Stewart's proclamations affected the price of Martha Stewart Living.

The prosecution tried to revive that case Thursday, calling Bear Stearns securities analyst Kevin Gruneich to the stand. Gruneich read aloud from a Martha Stewart Living prospectus that said the company's reliance on Stewart's personality was among its biggest risks. Her image was "integral" to the marketing of the brand, he said.

While the fraud charge carries a larger sentence, the obstruction charge has appeared the more viable after Stewart's lawyers were unable to discredit the testimony of Bacanovic's assistant last week. Douglas Faneuil's testimony backed up the government's claim that Stewart sold after Faneuil tipped her to selling by Waksal -- not because of any informal stop-loss agreement.

Prosecutors are expected to wind up their case tomorrow with the testimony of two of Faneuil's friends.