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Martha Stewart

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PROSECUTING MARTHA STEWART: THE OVERVIEW; Martha Stewart Indicted by U.S. On Obstruction
By CONSTANCE L. HAYS
Published: June 05, 2003
Martha Stewart was indicted yesterday on charges of conspiracy, obstruction of justice and securities fraud, all linked to a personal stock trade she made in 2001.
She pleaded not guilty and pledged to fight the charges. Hours after her arraignment in federal district court in Manhattan, the media and merchandising company she founded, Martha Stewart Living Omnimedia, announced that she was stepping down as chairwoman and chief executive. She will continue as a director and is expected to remain a force as the company's ''chief creative officer.'' [Page C1.]
The indictment depicted Ms. Stewart as going out of her way to conceal the circumstances of the sale of nearly 4,000 shares of ImClone Systems, a transaction that investigators say she made after learning that her friend, Samuel D. Waksal, the company's founder, and his daughter were selling their own stock. Indeed, the charges focused less on the trade than on an elaborate cover-up that prosecutors say came afterward.
According to the indictment, Ms. Stewart lied to investigators by telling them that she and her stockbroker had previously agreed to sell the shares if their market value fell below a certain price, and altered a phone message from the broker in her assistant's computer ''immediately following a lengthy conversation with her attorney.''

At a news conference announcing the charges against Ms. Stewart, James B. Comey, the United States attorney for the Southern District of New York, said, ''This criminal case is about lying -- lying to the F.B.I., lying to the S.E.C., lying to investors.'' Addressing a question that has long hovered over the investigation, he added, ''Martha Stewart is being prosecuted not for who she is, but because of what she did.''
A separate civil complaint from the Securities and Exchange Commission accused her of insider trading, based on information she is said to have received from Douglas Faneuil, assistant to the stockbroker, Peter Bacanovic. ''That was illegal insider trading,'' the regional director of the S.E.C., Wayne Carlin, said.
Mr. Bacanovic, no longer Ms. Stewart's broker, was also indicted yesterday on criminal charges, including perjury, and is named in the S.E.C. complaint as well. He pleaded not guilty to the criminal charges.
Ms. Stewart seemed composed as she entered a federal courtroom yesterday afternoon, flanked by lawyers and wearing a beige pantsuit. The judge, Miriam G. Cedarbaum, released both her and Mr. Bacanovic without bail, although Mr. Bacanovic was ordered to surrender his passport.
Mr. Bacanovic's lawyer, Richard M. Strassberg, said, ''We are confident he will be fully vindicated at trial.''
If convicted on all the charges, Ms. Stewart could face several years in prison and the possibility of a steep fine. A recent Justice Department directive discourages assigning white-collar offenders to house arrest.
After her arraignment, she did not speak to reporters and photographers massed outside the courthouse in the rain. But her lawyers issued a statement saying she was being made ''the subject of a criminal test case designed to further expand the already unrecognizable boundaries of the federal securities laws,'' and they predicted that she would be ''fully exonerated.''Ms. Stewart has vigorously defended her sale of ImClone stock as ''entirely lawful'' and promised to fight the charges. But she faces an uphill battle. In addition to the civil and criminal cases against her, several groups of investors in Martha Stewart Living Omnimedia are suing her over her conduct. Mr. Comey said he used ''my discretion'' in deciding not to bring insider trading charges against Ms. Stewart and her broker. He said case law would support such charges, but he called them ''unprecedented.''
The S.E.C. contended that Ms. Stewart should have known she was receiving illegal information when Mr. Faneuil told her the Waksals were selling their ImClone shares. It is seeking to have her barred from serving as a director of any public company, including her own, and to limit any executive role in a company.
''From our perspective, this case involved insider trading,'' said Barry Rashkover, the S.E.C.'s associate regional director. ''She is a tippee. We allege that she knew or recklessly disregarded that, and traded on that information.''
Ms. Stewart can be prosecuted for obstruction of justice even if the government does not accuse her of insider trading, said Michael Shepard, a partner in San Francisco at the law firm of Heller Ehrman White & McAuliffe. ''The question is whether you were messing with something that might be material in an investigation,'' he said.
The indictment, returned early yesterday by a Manhattan grand jury, describes a series of meetings between Ms. Stewart and investigators from the S.E.C., the Justice Department and the F.B.I. in February and April 2002. It lists various statements she made that prosecutors contend were false, and details meetings and phone conversations she had with Mr. Bacanovic before each of them was questioned.
''Stewart and Bacanovic agreed that rather than tell the truth about the communications with Stewart on Dec. 27, 2001, and the reasons for Stewart's sale of ImClone stock on Dec. 27, 2001, they would instead fabricate and attempt to deceive investigators with a fictitious explanation for her sale,'' according to the indictment. That explanation was the ''pre-existing agreement to sell the stock if and when the price dropped to $60 per share.''
A blue pen figured prominently in the case against Mr. Bacanovic. Prosecutors contend that some time after January, when he learned about the S.E.C. inquiry, Mr. Bacanovic scribbled the notation ''@60'' on a worksheet that listed Ms. Stewart's ImClone holdings and carried some comments that were written in blue ink on Dec. 21, 2001. ''Peter Bacanovic altered the worksheet, using ink that was blue ballpoint, but was scientifically distinguishable from the ink used elsewhere on the worksheet,'' the indictment said.
In accusing Ms. Stewart of securities fraud, the indictment, referring to her company by its initials, pointed to three statements she or her lawyer made proclaiming her innocence once her ImClone sale became widely known, it said, ''in an effort to stop or at least slow the steady erosion of MSLO's stock price caused by investor concerns.''
One of the statements was made to a reporter for The Wall Street Journal on June 6, 2002, and published the next day. The statement said Ms. Stewart's ImClone trade was ''executed because Ms. Stewart had a predetermined price at which she planned to sell the stock.''
''That determination,'' it added, ''made more than a month before the trade, was to sell if the stock ever went less than $60.''
Another statement, issued on June 12, also said that an existing agreement led to the stock sale.
But the indictment asserted, ''Stewart falsely stated that she 'did not have any nonpublic information' regarding ImClone when she sold her ImClone shares.'' The stock of her company rebounded by 7 percent after the statement, according to the indictment.
A third statement on June 18, made after the stock market closed, also repeated her contention that the $60-a-share price floor influenced her decision to part with her ImClone shares. ''On June 18, 2002, MSLO stock closed at $14.40,'' the indictment said. ''On June 19, 2002, the first day of trading after Stewart issued the June 18 statement, MSLO stock closed at $16.45, representing an increase of approximately 14 percent.''
Since the investigation became widely known a year ago, the company's business has declined in every division, from television to publishing and product sales.
Laura Richardson, an analyst with Adams, Harkness & Hill in Boston, said the removal of Ms. Stewart indicated the beginning of a turnaround. ''It shows some seriousness about improving the business fundamentals,'' she said.
Sharon L. Patrick, the president, will succeed Ms. Stewart as chief executive. Jeffrey Ubben, whose Value Act Capital Partners invested in Ms. Stewart's company shortly before the news of her ImClone trade emerged, will be chairman.
''If this is just a change in titles but not in roles, it won't be any different,'' Ms. Richardson said. ''If it is a true change in roles, it would be a step forward for them in coming out of this negative period.''
Mr. Comey called the indictments ''a tragedy'' for the company and its 600 employees. ''It's a tragedy that could have been prevented if those two people had only done what parents have taught their children for eons,'' he said, ''that if you are in a tight spot, lying is not the way out. Lying is an act with profound consequences.''

United States Attorney
Southern District of New York
FOR IMMEDIATE RELEASE CONTACT: U.S. ATTORNEY'S OFFICE
JUNE 4, 2003 MARVIN SMILON, HERBERT HADAD,
MICHAEL KULSTAD
PUBLIC INFORMATION OFFICE
(212) 637-2600
MARTHA STEWART AND HER BROKER INDICTED BY U.S. GRAND
JURY; STEWART CHARGED SEPARATELY WITH SECURITIES FRAUD
JAMES B. COMEY, the United States Attorney for the
Southern District of New York, and KEVIN P. DONOVAN, the Assistant
Director in Charge of the New York Office of the Federal Bureau of
Investigation (the “FBI”), announced the filing today in Manhattan federal court of an Indictment charging MARTHA STEWART, the chairman of the board of directors and chief executive officer of
Martha Stewart Living Omnimedia, Inc. (“MSLO”), and PETER
BACANOVIC, a former securities broker at Merrill Lynch & Co., Inc., with conspiracy, obstruction of justice and making false statements to federal agents. The Indictment separately charges STEWART with securities fraud in connection with her artificial manipulation of the price of MSLO common stock, and separately charges BACANOVIC with perjury in testimony given before the United States Securities and Exchange Commission (the “SEC”) and with making and using false documents, in connection with his fabrication of a document submitted to the SEC.
2
The Indictment charges that STEWART and BACANOVIC engaged in a scheme to obstruct investigations by the SEC, the FBI and the
U.S. Attorney’s Office for the Southern District of New York into
STEWART’s sale of stock in ImClone Systems Incorporated (“ImClone”) on December 27, 2001, the day before ImClone announced a negative decision by the U.S. Food and Drug Administration. According to the Indictment, STEWART and BACANOVIC conspired to conceal and cover up that BACANOVIC had caused STEWART to be provided confidential, nonpublic information regarding efforts by ImClone’s then-chief executive officer, Samuel Waksal, and a member of his family, to sell all of the ImClone stock they held at Merrill
Lynch, and that STEWART had sold her ImClone stock while in possession of that information.
The Indictment’s securities fraud charge against MARTHA
STEWART arises from her making false and misleading statements to the investing public regarding the reasons for her December 27,
2001, sale of ImClone stock.
STEWART’s Sale of ImClone Stock
According to the Indictment, between 9:00 a.m. and 10:00
a.m. on December 27, 2001, BACANOVIC learned that Samuel Waksal and a member of his family were seeking to sell all the ImClone shares they held at Merrill Lynch, then worth more than $7.3 million
(collectively referred to as the “Waksal Shares”). According to the Indictment, within minutes after being informed of the efforts
3
to sell the Waksal Shares, BACANOVIC called STEWART. After being told that STEWART was in transit and unavailable, BACANOVIC left a message, memorialized by STEWART’s assistant, that “Peter Bacanovic thinks ImClone is going to start trading downward.” The Indictment states that at the time BACANOVIC left this message for STEWART,
ImClone’s stock price was approximately $61.53 per share.
According to the Indictment, BACANOVIC, who was on vacation, directed his assistant, Douglas Faneuil, to inform STEWART about the Waksal transactions when she returned the call.
According to the Indictment, on December 27, 2001, at approximately 1:39 p.m. (EST), STEWART telephoned the office of
BACANOVIC and spoke to Douglas Faneuil, who informed her that
Samuel Waksal was attempting to sell all of the ImClone stock that
Waksal held at Merrill Lynch. Upon hearing this news, STEWART directed Faneuil to sell all of her ImClone stock, 3,928 shares, yielding proceeds of approximately $228,000.
The Indictment states that by selling a total of 3,928 shares of ImClone stock on the same day as the sale and attempted sale of the Waksal Shares, STEWART avoided significant trading losses. On December 31, 2001, the first day that ImClone stock traded after the FDA’s decision was publicly announced, the price of ImClone stock opened at $45.39, representing a decline of approximately 18%.
4
The Scheme to Obstruct Justice
In January 2002, the SEC, the FBI and the U.S. Attorney’s
Office commenced investigations into trading in ImClone securities in advance of the public announcement of the FDA’s negative decision, including into the trades conducted by Samuel Waksal and
MARTHA STEWART. The Indictment charges that STEWART and BACANOVIC agreed that rather than tell the truth about the communications with STEWART on December 27, 2001 and the reasons for STEWART’s sale of ImClone stock on December 27, 2001, they would instead fabricate and attempt to deceive investigators with a fictitious explanation for her sale -- that STEWART sold her ImClone stock on
December 27, 2001 because she and BACANOVIC had a pre-existing agreement to sell the stock if and when the price dropped to $60 per share.
The Indictment charges that STEWART, in an interview with the SEC, the FBI and the U.S. Attorney’s Office, and BACANOVIC, both in an interview with the SEC and in sworn testimony with the
SEC, made false statements regarding STEWART’s sale of ImClone stock. According to the Indictment, among other things, both
STEWART and BACANOVIC concealed and covered up that BACANOVIC caused STEWART to be informed of the Waksal transactions and that
STEWART had sold her ImClone stock while in possession of that information. Instead, the Indictment charges that STEWART and
5
BACANOVIC falsely stated that they had a pre-existing agreement to sell her ImClone shares if ImClone’s market price fell to $60 per share. The Indictment further charges that STEWART and BACANOVIC each falsely denied having any conversations regarding STEWART’s
ImClone sale or the federal investigations of that sale. The
Indictment alleges that STEWART and BACANOVIC in fact had conversations regarding STEWART’s sale of ImClone shares and the investigations of that sale. Among other things, the Indictment states that STEWART called BACANOVIC on the day she learned that the FBI and U.S. Attorney’s Office had requested to interview her; that BACANOVIC called STEWART at 7:09 a.m. the morning of her interview with federal agents; and that STEWART placed multiple phone calls to BACANOVIC the day before and the morning of his sworn testimony with the SEC.
The Indictment also alleges that STEWART in her interview with federal agents falsely stated that she did not know whether the phone message BACANOVIC left for STEWART on December 27, 2001, was recorded in the phone message log maintained by her assistant.
The Indictment charges, however, that four days before the interview, knowing that BACANOVIC’s message for STEWART was based on information regarding the sale and attempted sale of the Waksal6
Shares that BACANOVIC subsequently caused to be conveyed to her,
STEWART temporarily deleted the substance of BACANOVIC’s phone message, changing the message from “Peter Bacanovic thinks ImClone is going to start trading downward,” to “Peter Bacanovic re imclone.” After altering the message, STEWART directed her assistant to return the message to its original form.
The Indictment further charges that, in addition to making false statements, BACANOVIC altered a document in order to fabricate evidence that would falsely corroborate BACANOVIC’s and
STEWART’s claims that STEWART had decided to sell her ImClone stock if the market price fell to $60 per share. According to the
Indictment, on or about December 21, 2001, BACANOVIC printed a
“worksheet” that listed each of the stocks held by STEWART at
Merrill Lynch, including ImClone (the “Worksheet”). On or about
December 21, 2001, BACANOVIC made handwritten notes in blue ballpoint ink on the Worksheet concerning “tax loss selling” transactions and planned transactions in STEWART’s account, but made no notes regarding any purported decision to sell STEWART’s
ImClone shares at $60 per share. According to the Indictment, after learning of the SEC’s investigation of STEWART’s sale of
ImClone stock, BACANOVIC altered the Worksheet, using ink that was blue ballpoint, but was scientifically distinguishable from the ink 7 used elsewhere on the Worksheet. BACANOVIC added the notation “@
60” near the entry for ImClone.
STEWART’s Securities Fraud
The Indictment also charges STEWART with defrauding MSLO investors by manipulating artificially the price of MSLO stock through a series of false statements designed to deceive the investing public. The Indictment alleges that following the public announcement that STEWART had sold ImClone shares on the same day as members of the family of Samuel Waksal, MSLO’s market price began steadily to fall, from a closing price of $19.01 on June 6,
2002 to a closing price of $11.47 on June 28, 2002. The Indictment states that as of June 6, 2002, STEWART held 30,713,475 shares of
MSLO Class A common stock, which constituted 62.6% of the outstanding Class A common stock of MSLO.
According to the Indictment, in an effort to stop or at least to slow, the steady erosion of MSLO’s stock price caused by investor concerns, STEWART made and/or caused to be made a series of false and misleading public statements regarding her sale of
ImClone stock on December 27, 2001 that concealed that STEWART had been provided information regarding the sale and attempted sale of the Waksal Shares and that STEWART had sold her ImClone stock while in possession of that information. The Indictment charges that
8
STEWART made these false statements with the intent to defraud and deceive purchasers and sellers of MSLO common stock and to maintain the value of her own MSLO stock by preventing a decline in the market price of MSLO’s stock. These false and misleading statements were contained in: (a) statements made on behalf of
STEWART by one of her attorneys to the Wall Street Journal, published on June 7, 2002; (b) written public statements issued by
STEWART on June 12 and 18, 2002; and (c) statements made by STEWART at a conference for securities analysts and investors on June 19,
2002.
According to the Indictment, among other things, STEWART falsely stated that she “did not have any nonpublic information regarding ImClone when [she] sold [her] ImClone shares” and that her sale of ImClone stock was executed because she had a predetermined plan to sell her ImClone stock if the stock price were to fall below $60 per share. The Indictment charges that MSLO stock rose after STEWART issued her written public statements on
June 12 and 18, 2002. On June 13, 2002 – the first day of trading after STEWART issued the June 12 statement – the price of MSLO stock opened at $16.05 per share, representing a 7% increase from the $15 closing price on June 12. On June 19, 2002, the day
STEWART read her June 18 statement at a conference for securities
9 analysts and investors, MSLO stock closed at $16.45, representing an increase of approximately 14%.
STEWART and BACANOVIC surrendered to federal authorities today and the case was assigned to United States District Judge
MIRIAM GOLDMAN CEDARBAUM.
STEWART, 62, lives in Westport, Connecticut.
BACANOVIC, 41, lives in Manhattan.
Faneuil previously pled guilty to one count of receiving items of value in exchange for not informing against BACANOVIC and
STEWART. Faneuil is scheduled to be sentenced by United States
Magistrate Judge KEVIN NATHANIEL FOX on September 9, 2003.
Mr. COMEY, a member of the President’s Corporate Fraud
Task Force, praised the efforts of the FBI. Mr. COMEY also thanked the SEC for its assistance in the investigation of this case.
Assistant United States Attorneys KAREN PATTON SEYMOUR,
RICHARD D. OWENS and MICHAEL S. SCHACHTER are in charge of the prosecution. The charges contained in the Indictment are merely accusations, and the defendants are presumed innocent unless and until proven guilty.
MAXIMUM PENALTIES
COUNT CHARGE DEFENDANT MAXIMUM PENALTY
One Conspiracy
(18 U.S.C. § 371)
STEWART
BACANOVIC
5 years in prison;$250,000 fineTwo False Statements
(18 U.S.C. § 1001) BACANOVIC 5 years in prison;$250,000 fine
Three False Statements
STEWART 5 years in prison; $250,000 fine
Four False Statements
STEWART 5 years in prison; $250,000 fine
Five False Documents in prison; $250,000 fine
Six Perjury
BACANOVIC 5 years in prison; $250,000 fine
Seven Obstruction Of Agency Proceedings
BACANOVIC 5 years in prison; $250,000 fine
Eight Obstruction Of Agency Proceedings
STEWART 5 years in prison; $250,000 fine
Nine Securities Fraud
STEWART 10 years in prison; fine of $1 million or twice gain or loss

Martha Stewart was convicted Friday of obstructing justice and lying to the government about a superbly timed stock sale — a devastating verdict that probably means prison for the woman who epitomizes meticulous homemaking and gracious living.
Stewart, 62, grimaced and her eyes widened slightly upon hearing the verdict, and she later released a statement maintaining her innocence and promising an appeal.
The convictions jeopardize the media empire that Stewart carefully built over the years in becoming the nation's premier homemaker — an image she put forth by way of magazines, TV programs and everything from cookie cutters and garlic presses to bedsheets and pillows. Martketing experts have said that the company is so closely tied to her name and face that the effect could be devastating.
The government now may press to have her removed from the board of her company. She stepped down as chief executive after being indicted last summer but remains as chief creative officer.
Stewart was found guilty of conspiracy, making false statements and obstruction of justice. The charges carry up to 20 years in prison at sentencing June 17, but she will most certainly get much less than that under federal sentencing guidelines.
Her ex-stockbroker, Peter Bacanovic (search), 41, was convicted of conspiracy, perjury, making a false statement and obstruction of justice, but was acquitted of making a false document.
"Maybe it's a victory for the little guys who lose money in the market because of these kinds of transactions," said juror Chappell Hartridge.
Stewart left the courtroom with a somber expression, and she did not speak to anyone at the defense table before going to a holding room away from the media. She and Bacanovic must report to a probation office within a week for processing.
Stewart spent most of her last hour before the verdict checking her watch and twirling a pen in her fingers. Her daughter, Alexis Stewart (search), was in tears after the verdict.
"I am obviously distressed by the jury's verdict but I continue to take comfort in knowing that I have done nothing wrong," Stewart said in a statement on her Web site.
The jury of eight women and four men reached the verdicts on the third day of deliberations in the case.
Stewart's conviction came on a volatile day of trading in her company, Martha Stewart Living Omnimedia (MSO). The stock shot up on word of a verdict, then trading was briefly halted. The stock plummeted after trading resumed.
The charges centered on why Stewart dumped about $228,000 worth of ImClone Systems (IMCL) stock on Dec. 27, 2001, just a day before it was announced that the Food and Drug Administration had rejected ImClone's application for approval of a cancer drug. The announcement sent ImClone's stock plummeting.
Stewart and Bacanovic claimed they had a standing agreement to sell when the price fell below $60. But the government contended that was a phony cover story and that Stewart sold because she was tipped by her broker that ImClone CEO Sam Waksal (search) was frantically trying to dump his own holdings.
Waksal later admitted selling his stock based on advance word of the FDA decision. He is serving seven years in prison for insider trading.
Stewart, who averted more than $51,000 in losses by selling when she did, was not charged with insider trading; instead, she and her broker were accused of lying about the transaction and altering records to support the alleged cover story.
Stewart was easily the most recognizable face in the government crackdown on corporate crime that began with the collapse of Enron in 2001. Stewart's supporters claim she was being targeted because of her celebrity status.
The government's star witness was Douglas Faneuil (search), a former Merrill Lynch & Co. (MER) assistant who said he passed the tip about Waksal to Stewart on orders from his boss, Bacanovic.
Faneuil said that when he told Bacanovic about a flurry of selling by the Waksal family that morning, Bacanovic blurted: "Oh my God, get Martha on the phone." He also said Bacanovic pressured him to lie about the transaction.
Prosecutors further contended Bacanovic doctored a worksheet of Stewart's portfolio after the fact by making the notation "(at)60" next to her ImClone stock. A forensics expert with the Secret Service testified that the mark was made in a different ink.
In addition, Stewart's personal assistant testified Stewart altered a computer log of a Dec. 27, 2001, message from Bacanovic, then immediately told her to restore the log to its original wording.
Also, a longtime Stewart friend, Mariana Pasternak, testified Stewart confided that she had known the Waksals were selling. Pasternak said Stewart added: "Isn't it nice to have brokers who tell you those things?"
But Pasternak admitted on cross-examination that the remark may have been something she herself thought, not something Stewart said.
In closing arguments, prosecutor Michael Schachter (search) said the story about the arrangement to sell ImClone at $60 was "phony," "silly" and "simply an after-the-fact cover story." He said Stewart and her broker "left behind a trail of evidence exposing the truth about Martha Stewart's sale and exposing the lies they would tell."
For its part, the defense tried to discredit Faneuil as an admitted drug user and a liar. When the scandal broke, he initially backed up his boss, but later pleaded guilty to a misdemeanor, saying he had received an extra week of vacation and a free airline ticket for keeping his mouth shut.
Stewart did not testify, and her lawyers called only one witness during a defense that lasted less than an hour.
In closing arguments, defense attorney Robert Morvillo (search) said that the conspiracy as outlined by the government was too sloppy to be true. He urged the jury to let Stewart get back to "improving the quality of life for all of us."
"If you do that," he said, echoing Stewart's slogan, "it's a good thing." Stewart could have faced even more prison time, but the judge threw out the most serious charge — a securities fraud count that alleged she deceived investors in her own company when she publicly declared her innocence in the scandal. The judge had referred to the charge as "novel."
At times, the trial seemed more fodder for gossip columns than the financial pages. Stewart's arrival each day was chronicled by a barrage of photographers and camera crews, with the tabloids taking careful note of her expensive handbags and stylish heels. Celebrities Rosie O'Donnell, Bill Cosby and Brian Dennehy all showed up in court in support of Stewart.
Stewart had a reputation before the trial as a ruthless businesswoman, and in court she was portrayed as rude, insulting, demanding and cheap. According to testimony, she once threatened to take her business elsewhere because she did not like her brokerage's telephone hold music.
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Martha Stewart's conviction upheld
Appeals court affirms that the style maven lied to investigators about a well-timed sale of stock.
January 6, 2006: 4:20 PM EST
NEW YORK (CNNMoney.com) - A federal appeals court Friday upheld the conviction of celebrity style setter Martha Stewart for lying about a stock sale.
In 2004, Stewart was convicted on charges of conspiracy, obstruction of justice and making false statements and her former Merrill Lynch stockbroker, Peter Bacanovic, was convicted on four of five counts against him.
Stewart served five months in prison and near six months of house arrest starting in October 2004.
The charges stemmed from Stewart's sale of almost 4,000 shares of ImClone Systems stock in late 2001, just before the shares tumbled following a negative FDA ruling about the cancer drug Erbitux, which was later approved for use against colon cancer.
Stewart was released from house arrest last August.
The decision by the U.S. Court of Appeals for the Second Circuit in New York affirms that her conviction will not be overturned. But the court also ruled that Bacanovic's sentence could be reviewed.
"We conclude that none of the numerous grounds upon which defendants challenge their convictions provides a basis to disturb the jury's verdict and, therefore, we affirm the judgments of the District Court, and remand the case solely for consideration of whether to modify Bacanovic's sentence," the appellate court said in its ruling.
The upholding of the conviction could impact Stewart's business career and keep her from returning to the helm of the company she founded Martha Stewart Living Omnimedia (Research).
There is no SEC rule stating that convicted felons may not be officers of public companies. But most publicly traded companies aren't likely to let a felon head the company, according to Solomon Wisenberg, a white collar criminal defense lawyer in Washington.
Martha Stewart Living Omnimedia has suffered since Stewart was convicted in a case that gripped public attention. Shares of the company have tumbled nearly 40 percent in the last year.
In its most recent challenge, the company said James Follo, its chief financial and administrative officer, plans to resign in March.
Wisenberg said the ruling on Stewart's appeal was not surprising, since it is difficult to overturn convictions for lying to the government.
Stewart could appeal her case to the Supreme Court, but it's extremely unlikely that such an appeal would be granted because "there are no earth-shaking issues other than the fact that she's Martha Stewart," he said.
Stewart's lawyers could not immediately be reached for comment.

Having now reviewed the allegations and available evidence in "mind-numbing" detail (as one reader put it), we are in a position to draw some preliminary conclusions. Again, only a fraction of the evidence has been released, so these conclusions may change radically during the trial.First, it seems safe to say that no one will ever know why Martha Stewart sold her ImClone stock on Dec. 27, 2001; even Stewart herself is probably not certain what mix of factors triggered the decision. Stewart probably had many bits of information—sharp price decline, extreme volume, negative rumors, impending announcement, prior intention, etc.—and one of these might have been that Sam Waksal was trying to sell some stock. Depending on how the Waksal information was related and what weight Stewart gave it, this might have been anywhere from the sole reason for the sale to a minor data point. If the U.S. attorney had charged Stewart with insider trading, it wouldn't matter whether the information contributed to the decision: The questions would be whether it was "material nonpublic information" and whether Stewart knew it had been "misappropriated," and if the answers were determined to be "yes," she would have broken the law merely by trading while in possession of it (unless she had previously instructed her broker to sell, in which case the trade would be legal no matter what she knew). But the U.S. attorney didn't charge Stewart with insider trading.What the U.S. attorney did charge Stewart with was obstructing an insider-trading investigation that determined, ironically, that she shouldn't be charged with insider trading (not necessarily that she didn't commit this offense, just that she shouldn't be charged with it). Just as ironic, even though the trade's legality or illegality will not be formally determined at the trial, it may still be one of the jury's most important considerations. From a moral perspective, if not a legal one, if the jury believes that Stewart's trade was, in fact, "entirely lawful," this will likely appeal to its sense of fairness: It may be illegal to escape from jail, but the crime feels more justifiable if the escapee was wrongly imprisoned in the first place. On the other hand, if the jury believes the trade was illegal, or even shady—an instance of an arrogant, rich person taking advantage of privilege—then the jury may feel Stewart deserves to be punished, even if what she's punished for isn't insider trading (it is no accident that the indictment often implies that Stewart committed this crime). Even if the jury believes Stewart should be found guilty of something, however, its members may still grapple with whether charges of "conspiracy," "obstruction of justice," and "criminal securities fraud" are appropriate. These crimes are serious felonies; people convicted of them usually should go to jail. In this case, however, one can imagine that a reasonable person, having reviewed the circumstances and evidence, might feel that incarceration is neither appropriate nor deserved.Next, with regard to the obstruction charges, unless Peter Bacanovic suddenly pleads guilty and testifies against Stewart (which seems highly unlikely—he presumably has already resisted intense pressure to do so), the case will likely boil down to the explanations for a couple of phone calls and a handful of oral statements that were neither recorded nor made under oath. Most of these statements concerned either the $60 understanding or the claim that Stewart gave her sell order to Bacanovic instead of Douglas Faneuil. In the first instance, unless Bacanovic or Stewart told someone (Faneuil? Ann Armstrong?) that the agreement was a lie, it is hard to imagine how the prosecution will prove that it didn't exist. In the second, it seems clear that Stewart made inaccurate statements to investigators; whether the prosecution can prove she made them with the intention of obstructing justice, however, is another question. One observer, Judge John E. Sprizzo, who is handling some of the civil cases against Stewart, recently remarked, "This is not the strongest obstruction case I've ever seen."And then there is the most serious charge: securities fraud. Unlike some observers, I don't think this charge is preposterous. If a key executive intentionally makes false statements about a subject relevant to his or her company's stock price, this can be fairly viewed as a fraud on the shareholders, and Martha Stewart is not only Martha Stewart Living Omnimedia's key executive, but also its brand and primary product, so her reputation is clearly relevant to the stock price. Because the alleged false statements were issued primarily to deny serious (and, in this case, false) allegations, however, I do think the charge is unfair. I also think it sets a dangerous precedent, one that places too much power in the hands of prosecutors, a group whose individual motives and incentives are often no better aligned with the "common good" than those of business executives (and, for that matter, most professionals).The securities fraud charge was based not on Stewart's public denial of guilt but her alternative (and allegedly false) explanation. The reason this is still problematic, in my opinion, is that it puts Stewart—and any other executive accused of wrongdoing—in a no-win situation: guilty or innocent, the accused cannot risk explaining his or her actions, even for the benefit of investors, for fear of getting slapped with the potentially more serious charge of securities fraud. As the following scenarios demonstrate, moreover, this precedent hurts not only falsely accused executives, but also investors—the people who the securities laws are supposed to protect. * If the accused executive is guilty and admits guilt, this is fair. The stock will justifiably get hammered. * If the accused executive is guilty, denies guilt, but doesn't explain for fear of getting charged with securities fraud, this is also fair. With no explanation, investors will be skeptical of the denial, and the stock will justifiably get hammered (although, if one is going to consider false explanations a crime, it seems logically inconsistent that false denials are not considered a crime). * If the accused executive is innocent, denies guilt, and doesn't explain for fear of getting charged with securities fraud, this is unfair. The lack of an explanation will be construed as guilt, and the stock will get hammered unjustifiably. * If the accused executive is innocent, denies guilt, explains, and then gets charged with securities fraud, this is awful, for both the executive and investors—the stock will get hammered even though no one committed a crime.The last scenario is the closest to the Stewart case. The prosecution obviously believes that Stewart gave a false explanation instead of a true one, but given the extraordinary price that Stewart, Bacanovic, and the shareholders of Martha Stewart Living Omnimedia have already paid as a result of this belief, one hopes that the prosecution's confidence is extremely high (and based on evidence more convincing than "we think she's full of it"). Otherwise, the implication is that we live in a society in which a handful of us can legally declare what is or isn't true and charge anyone who dares disagree with a felony—a situation that seems, if nothing else, distinctly un-American.The final question is a broader one: whether the alleged actions (these specific actions, not the broader crimes) warrant the destruction of half-a-billion dollars of shareholder value, the expenditure of tens of millions of tax dollars, the dedication of months of effort by some of the most potent, talented investigators and prosecutors in the country, and the cost and wasted time that will accompany any jail sentences—or whether there wasn't some other, more reasonable way the situation could have been resolved. If the only settlement offer from the prosecution was a felony guilty plea, one can understand why Martha Stewart and Peter Bacanovic would have refused it. Similarly, if the only offer from the defense was complete vindication, one can understand why the U.S. attorney's office, if convinced Stewart and Bacanovic broke the law, would have walked. But if ever a case cried out for a mutually acceptable compromise, this is it. | | | | | | |…...

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