A government expert lied about his role in examining a spreadsheet used in the insider trading trial of Martha Stewart and Peter Bacanovic, federal prosecutors charged Friday. Officials don't believe the allegations will affect the pair's convictions. Larry Stewart, the chief forensic scientist for the Secret Service, wasn't present at an initial examination of the spreadsheet in August 2002, despite testifying that he was involved in each forensic inspection of the document, the government alleged. He is charged with two counts of perjury in a complaint released Friday afternoon. Martha Stewart and Bacanovic, her former Merrill Lynch broker, were convicted March 5 of lying to the government about Stewart's well-timed sale of about 4,000 shares of ImClone Systems ( IMCL) in December 2001. Both are awaiting sentencing next month. Among other things, Bacanovic was charged with altering a spreadsheet record of Stewart's stock sales, an allegation supported by the Secret Service examiner, who testified Feb. 19 that the ink used to make a notation on the sheet was different from other ink on the page. Ironically, making and using false documents was the one count on which Bacanovic was ultimately acquitted. The government contended Bacanovic changed the record to suggest his client had a standing order to sell ImClone "at 60." The existence of a preset stop-loss order was central to the defense argument that Martha Stewart didn't make the ImClone sale after getting a tip, but simply sold her stock according to existing plans. Friday's complaint alleges that "notwithstanding his testimony at trial that he had personally participated in each of the forensic examinations of the worksheet,
Larry Stewart had no involvement in the original examination of the worksheet conducted in August 2002, and in fact did not even learn of the examination until it was complete," the U.S. Attorney said.
"It is further alleged that notwithstanding his testimony that he worked 'side by side' with another examiner in conducting a supplemental examination of the worksheet in January 2004, Stewart was consulted only briefly about the examination, and performed none of the actual work on it," the U.S. Attorney said. "The government does not believe that the integrity or validity of any of Martha Stewart's or Peter Bacanovic's verdicts is called into question by today's filing," he said. Defense laywers nevertheless vowed to seek redress. "We believe that the perjury of a key government witness undermines any integrity there was in the jury's verdict and requires a new trial and we will pursue that," says Richard Strassberg, the attorney for Bacanovic. Mr. Stewart, 46, was also charged with lying about knowledge of a book proposal on ink analysis shown to him by defense lawyers when on the stand. He is currently under arrest and faces a maximum total of 10 years in prison if convicted. Arraignment is scheduled for later Friday. Shares of Martha Stewart Living ( MSO) spiked 20% when word of the allegations leaked out at midday. They were recently up 85 cents, or 10%, to $9.40 on about three times the average volume. U.S. Attorney David Kelley said the charges were the result of information received by his inspection division 10 days ago. "The charges are troubling because a lab examiner violated the public trust," Kelley said. "However, we are confident the false testimony will have no impact on the decision." Conceivably, a perjury charge could give lawyers for Stewart and Bacanovic grounds for a new trial. But motions for a new trial are difficult to win and the road will be particularly hard in light of the U.S. attorney's statements. Typically the defense must demonstrate the discovery of new evidence that could have led the jurors to a different verdict. Judge Miriam Cedarbaum has already rejected an earlier motion for a new trial based on questions about the truthfulness of one of the jurors in the case. Asked if Friday's revelations cast a cloud over the convictions, Kelley replied: "No." Several defense lawyers contacted by TheStreet.com said the alleged misrepresentation probably won't be enough to compel a new trial. But it could help Stewart on appeal, as it adds to the list of potential errors committed during the trial. Martha Stewart's lawyer, Robert Morvillo, said in a statement on her Web site: "The arrest of one of the government's key witnesses for perjury clearly demonstrates that the trial of Martha Stewart was fatally flawed and unfair. This is an indication that not one but at least two significant perjuries took place during the course of the trial process. If anyone believes that Martha Stewart was not prejudiced, they are extremely naive."
The government held that Bacanovic added the "at 60" annotation after the fact and it called Larry Stewart to the stand on Feb. 19, about two weeks into the trial. The scientist testified that the pen used to make the annotation was an expensive one, while other markings on the same sheet were made from a cheap Paper Mate pen. Lawyers from both sides were meticulous in vetting the finer points of ink analysis with Mr. Stewart, with a defense expert testifying that another marking on the page was similar to the "at 60" notation and that numerous pens were used elsewhere on the sheet. In sometimes flustered testimony under defense cross-examination, Mr. Stewart acknowledged in his Feb. 19 testimony that not every mark on the page got the same initial analysis, but said infrared analysis of one mark that appeared similar to the "at 60" annotation was inconclusive. Mr. Stewart said testing the second mark, a dash next to an entry for Apple Computer, was impossible because the defense had used too much of the sample in its own tests.