2nd Setback For Martha Prosecutors

A federal judge on Tuesday limited one element of the government's effort to prove Martha Stewart and her stockbroker conspired to lie about Stewart's sale of ImClone Systems stock.

The judge said she may allow into evidence records that show Stewart and broker Peter Bacanovic talked by telephone in early 2002 — but would not allow prosecutors to speculate on what they talked about.

"You may not argue that, because there was a phone conversation on X day, the conversation must have been about X," U.S. District Judge Miriam Goldman Cedarbaum said before the jury was convened.

The judge also ordered prosecutors to modify a chart they hoped to use to summarize ImClone-related phone calls that took place on Dec. 27, 2001, the day Stewart sold her shares.

The judge ordered prosecutors to remove from the chart a minute-by-minute listing of ImClone's stock price, which was steadily declining on that day.

The judge said tying the stock price to the phone calls was a matter for the government's closing argument, not for evidence.

Stewart and Bacanovic are accused of lying to investigators about why Stewart sold 3,928 shares of ImClone Systems stock on Dec. 27, 2001, just before it plunged on a negative government review of an experimental ImClone cancer drug.

The government claims Bacanovic sent word to Stewart that ImClone CEO Sam Waksal was trying to dump his shares. Stewart and Bacanovic claim they had a deal to sell ImClone when it fell below $60 per share.

It was the second setback for the government in as many court sessions. The judge Friday also told prosecutors they will not be able to call expert witnesses such as stock analysts to support the securities fraud charge, which accuses Stewart of propping up the price of her own company, Martha Stewart Living Omnimedia, by proclaiming her innocence in the ImClone probe.

With the government close to resting its case against Martha Stewart, lawyers planning her defense are faced with an excruciating decision: Should they put her on the witness stand?

Attorneys not involved in the stock-fraud trial say having Stewart testify and opening her to cross-examination would be an enormous gamble, and her chief lawyer says he won't decide until he sees the government's full case. Prosecutors expect to rest Thursday.

But prosecution witnesses have exposed inconsistencies in the accounts of Stewart and her ex-stockbroker and have testified to behavior that only Stewart may be able to explain by testifying herself.

CBSNews.com Legal Analyst Andrew Cohen wouldn't be surprised if that decision comes only at the last minute.

"The lawyers have to figure out whether the upside to her testimony— her ability to convince jurors that she wasn't doing anything illegal — outweighs the downside that would come from a tough cross-examination," he said.

"They have put Martha and her lawyer in a position where there's danger whichever way she goes," said Greg Markel, chairman of litigation at the New York law firm Cadwalader, Wickersham & Taft.

Her lawyers, not Stewart herself, will make the call on whether she takes the stand, she has told an interviewer.

Observers say the likelihood Stewart will testify is far greater now than it was when the trial began. They pointed to two key developments in the government's case.

First, star witness Douglas Faneuil, the Merrill Lynch & Co. assistant who handled Stewart's sale, did not waver in his assertion that Bacanovic ordered him to tip Stewart that ImClone founder Sam Waksal was dumping his shares.

And second, Stewart's personal assistant, Ann Armstrong, testified that Stewart, just before meeting with federal investigators, altered a computer log of a message left by Bacanovic on Dec. 27, 2001, the day she sold. Stewart then immediately told her to change it back, Armstrong testified.

Stewart lawyer Robert Morvillo has told jurors Stewart had a busy holiday season in 2001 and was accurate when she told investigators she did not recall any tip about the Waksals.

J. Boyd Page, a white-collar attorney in Atlanta, said jurors probably want to hear an explanation directly from Stewart.

"The problem with not putting the client on the stand, particularly a high-profile client, is that so often the jury wants to hear from that person," he said.

"There are certainly some inconsistencies, some unusual acts, that if they can't be simply, reasonably explained can leave the jury with very much a bad impression," he said.

"Based on the facts of the case, I think that Martha Stewart has to take the stand in her own defense," former SEC prosecutor Robert Heim told CBS News Early Show National Correspondent Jon Frankel.

Heim says Stewart has built a successful career selling her image, "so interjecting some of her natural personality that you see on television would be very helpful, but at the same time the defense doesn't want too much rambling and straying away from their main message which is that she's innocent of the crimes."

"Stewart's team used jury consultants and so forth so they know fairly well what sells and what doesn't sell when it comes to Stewart's demeanor and personality and so forth," said Cohen. "Now, if those tests suggest that this jury wants to hear Stewart's side of the story, I think we could see her testify in her own defense and that would be fairly dramatic no matter how it turns out."

If Stewart takes the stand, she likely would face grueling cross-examination led by Karen Patton Seymour, head of the criminal division in the U.S. attorney's office.