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6/5/2003

Martha Stewart indicted in scandal

The Associated Press

NEW YORK — Martha Stewart, the steely perfectionist who built a fortune by selling her vision of good taste and gracious living, was indicted Wednesday in an insider-trading scandal that threatens her hold on her empire and could put her behind bars.

Federal prosecutors accused Stewart of dumping her stock in a biotechnology company in 2001 based on illegal privileged information, then covering her tracks and lying to investigators and shareholders.

The homemaking guru, who was a billionaire during the 1990s, saved $45,000 from the sale, according to the government.

Her stockbroker was also indicted.

“This criminal case is about lying — lying to the FBI, lying to the SEC and investors,” U.S. Attorney James Comey said. “That is conduct that will not be tolerated. Martha Stewart is being prosecuted not because of who she is, but what she did.”

The charges against her include securities fraud, conspiracy, obstruction of justice and making false statements and carry up to 30 years in prison and $2 million in fines.

Stone-faced and speaking deliberately, the 61-year-old Stewart told a federal judge: “Not guilty.”

Also Wednesday, the Securities and Exchange Commission filed a lawsuit leveling similar charges.

The charges spell not just serious legal trouble for Stewart, but a crisis for her media empire of home products, TV appearances and magazines that bear her name.

Martha Stewart Living Omnimedia has suffered in the year since the scandal broke, and some analysts say that advertisers may pull back even more, stores will stop striking new relationships with the company, and customers may turn away.

“Up until now, it has been a financial-page story. An indictment is something that everybody can understand,” said Seth Siegel, co-founder of the Beanstalk Group, a licensing agency.

Over the past year, a fascinated public has watched Stewart doling out advice on decorating or preparing a tasty dinner on television as the scandal unfolded.

The indictment resulted from an investigation into Stewart’s sale of nearly 4,000 shares of ImClone Systems Inc. on Dec. 27, 2001 — the day before an unfavorable Food and Drug Administration decision on ImClone’s cancer drug Erbitux sent its stock tumbling. Stewart has denied she was tipped off.

Peter Bacanovic, the former Merrill Lynch stockbroker who allegedly fed insider information to Stewart through an assistant, was charged with five counts, including perjury and obstruction of justice. He pleaded innocent. The charges carry up to 25 years in prison and $1.25 million in fines.

The SEC lawsuit asks the court to force Stewart and Bacanovic to pay more than $45,000 — the amount Stewart allegedly saved by selling the ImClone stock before the bad news reached Wall Street.

In a statement, Stewart attorney Robert Morvillo said his client had done nothing wrong, and questioned prosecutors’ motives.

“Is it for publicity purposes because Martha Stewart is a celebrity?” he said. “Is it because she is a woman who has successfully competed in a man’s business world by virtue of her talent, hard work and demanding standards?”

Stewart arrived at the courthouse with her lawyers at midday shielding herself from light rain with an off-white umbrella. She swept past reporters without saying a word. She was released without bail until her next court appearance June 19. Bacanovic was also set free without bail.

The indictment says Stewart unloaded her ImClone stock on inside knowledge that the family of ImClone founder Samuel Waksal, a friend of Stewart’s, was planning to sell its shares ahead of the government news.

ImClone’s stock plunged after the FDA announced it would not review the company’s application for approval of the once-promising drug.

The indictment does not claim Stewart had specific knowledge of the FDA decision — only that the Waksals were planning to sell.

She was not charged with insider trading, a more difficult charge to prove than fraud.