Saturday, March 6, 2004

Stewart found guilty; prison sentence likely

Stock plunges after verdict in trading scandal

Enquirer wire services

NEW YORK - Martha Stewart was found guilty Friday in a securities-trading case that has cost her about $250 million in stock value.

A jury found Stewart guilty of lying to federal investigators about a timely and profitable stock sale, a verdict that likely means prison time for the domestic arts queen and a setback for the media empire she built to promote "good things."

The charges of conspiracy, obstruction of justice and two counts of making false statements carry a combined maximum sentence of 20 years. But under federal guidelines, Stewart probably faces less than two years in prison.

She will remain free until a June 17 sentencing hearing.

While a devastating decision for Stewart, the verdict is also a blow to her company Martha Stewart Living Omnimedia. Magazines, TV shows and a host of homemaking and decorating products bear her now-tarnished name.

Stewart stepped down as chief executive after her indictment last summer and retains the title of chief creative officer. She owns 61.2 percent - about 30 million shares - of her multimedia empire and has seen the market value of her personal stake in the company drop about $250 million to about $326 million.

The sale at the heart of the criminal case allowed Stewart to avoid about $51,000 in losses in ImClone Systems stock. Friday, her stake in Martha Stewart Living fell about $95 million as shares plunged $3.17 to $10.86.

Shares, already battered since the beginning of the case, plunged 23 percent after the verdict was announced; they had risen 16 percent just before the verdict, with investors apparently betting on an acquittal.

Stewart's former stockbroker, Peter Bacanovic, 41, was convicted of perjury, conspiracy, making a false statement and obstruction of justice, but was acquitted of making a false document. He faces similar sentencing.

'I will appeal'

Stewart has been the highest-profile figure in the procession of corporate scandals that emerged after the tech stock boom and bust of the 1990s.

She reacted with a wide-eyed grimace when the jury of eight women and four men handed down their decision after three days of deliberations. Her daughter, Alexis Stewart, was in tears.

"I am obviously distressed by the jury's verdict," Stewart, 62, said in a statement. "I will appeal the verdict and continue to fight to clear my name. I believe in the fairness of the judicial system and remain confident that I will ultimately prevail."

A stoic Stewart left the courthouse about an hour after the verdict, passing through a media frenzy as supporters yelled, "We love Martha!"

U.S. Attorney David Kelley said the decision sends a message to corporate America.

"The word is beware. Don't engage in this kind of conduct because it will not be tolerated," he said on the courthouse steps. "The victims in this case are the entire American public who rely on the integrity of our system to make sure that justice is done and they can invest their money safely and securely."

Stewart's lawyer Robert Morvillo said he was confident about an appeal and that he viewed the verdict "as having lost the first round."

The government now might seek to have her removed from the Martha Stewart Living Omnimedia board. The board will meet soon to "evaluate the situation and take actions as appropriate," the company said in a statement.

Celebrity backlash

Chappell Hartridge, a juror who spoke with reporters after the verdict, said the ruling should help the little investor.

"They may feel a little bit more comfortable that they can invest in the market and not worry about these types of scams where they can lose their 401(k)s," he said.

Hartridge said the appearance at the trial of Stewart's celebrity pals such as Rosie O'Donnell and Bill Cosby might have backfired.

"If anything, we may have taken it a little as an insult," he said. "Is that supposed to sway our opinion?"

Three other trials related to corporate wrongdoing continue in New York, with prosecutors targeting former executives from Tyco, Adelphia Communications Corp. and WorldCom. Trials involving former executives from WorldCom and Enron also are ahead.

The trials "generate a great deal of general deterrence for corporate officials," said John C. Coffee Jr., a Columbia Law School professor who specializes in white-collar crime and securities fraud.

He said that previously, executives might have felt they faced only a slap on the wrist from federal regulators and a corporate settlement.

"Now you're seeing individuals recognizing their own lives are at risk, and sentences as long as 20 years or more are real prospects," he said.

Trail of deception

The government had accused Stewart of selling her almost 4,000 shares of ImClone Systems Inc. - worth about $228,000 - Dec. 27, 2001 after receiving an illegal tip that the family of ImClone founder Sam Waksal was planning to sell its stock.

Stewart maintained that she and Bacanovic, who worked for Merrill Lynch & Co. at the time, had an agreement to sell her ImClone stock if it fell to $60 a share.

While not charging them with insider trading, prosecutors said Stewart and Bacanovic concocted that agreement and deceived investigators to cover up their true motivations.

The day after Stewart's sale, ImClone stock plunged on the news that the government would issue a negative report about an ImClone cancer drug.

In the government's most damaging testimony, Douglas Faneuil, a brokerage assistant who worked for Bacanovic, said Stewart ordered him to sell her ImClone shares after he gave her the illegal tip.

Defense lawyers tried to portray Faneuil as an admitted liar who at first deceived investigators and later made a deal with prosecutors to protect himself.

Faneuil has pleaded guilty to a misdemeanor charge of receiving gifts in exchange for not reporting a crime. At a sentencing hearing scheduled for this summer, he faces up to a year in prison and a $100,000 fine.

Hartridge, the juror, said Faneuil's testimony made a difference.

"I feel bad for him because he was dragged into this," said Hartridge, 47, a computer technician at an insurance company. "He, from the beginning, thought something was wrong and this wasn't the right thing to do, but he listened to what his boss asked him to do."

Hour-long defense

ImClone founder Waksal pleaded guilty in 2002 to telling his daughter to sell shares because he had advance word of the report. Waksal, a longtime Stewart friend, is serving seven years in federal prison.

While the prosecution called an array of witnesses over several weeks, Stewart's lawyers presented a minimalist hour-long defense, calling one witness and keeping their celebrity client off the stand.

"It didn't make a difference if she testified or not," Hartridge said. "We based everything on evidence."

The defense team had been buoyed a week ago when U.S. District Judge Miriam Goldman Cedarbaum tossed out the most serious charge, a count of securities fraud that accused Stewart of deceiving investors in her company when she publicly declared her innocence.

The jury did acquit Bacanovic on a charge of making a false document. The government had accused him of doctoring a worksheet to support claims that there was an agreement to sell ImClone when it fell to $60 a share.

The trial saw dozens of satellite news trucks lining the street and scores of reporters and TV crews camping out across from the courthouse under white tents, and included appearances by celebrities who came out to support Stewart including Brian Dennehy, Rosie O'Donnell and Bill Cosby.

On the Web: Martha Stewart defense site:; Martha Stewart fan site:

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