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Stewart charged with fraud

She steps down as chairman and CEO of media empire

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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 could put her behind bars. Hours later, she stepped down as chairman and chief executive officer of her media empire.

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

"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 indictment charges Stewart with securities fraud, conspiracy, obstruction of justice and making false statements. If convicted of all counts, she could face up to 30 years in prison and $2 million in fines, although the penalty would likely be far lighter under federal sentencing guidelines.

In court Wednesday, the 61-year-old Stewart pleaded innocent. Stone-faced and speaking deliberately, she told a federal judge: "Not guilty."

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 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.

A statement from Martha Stewart Living Omnimedia Inc. said Stewart would remain on the company's board.

"I love this company, its people, and everything it stands for, and I am stepping aside as chairman and CEO because it is the right thing to do," she said.

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.

The charges against Peter Bacanovic, the former Merrill Lynch stockbroker who allegedly fed insider information to Stewart through an assistant, include conspiracy, perjury and obstruction of justice. He pleaded innocent during the same hearing as Stewart, where they kept their distance.

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 booked out of view of the media, then 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.

According to the government, Bacanovic's tip on the Waksals was passed to Stewart through the broker's assistant, Douglas Faneuil. Faneuil pleaded guilty last year to taking gifts to keep quiet about Stewart's stock sale.

Stewart went so far as to delete a computer log of a phone message in which Bacanovic told her he thought ImClone was "going to start trading downward," according to the indictment.

The government also said Bacanovic altered his personal notes about Stewart's portfolio after he learned the government was investigating her, trying to create the impression he and Stewart had an agreement to sell ImClone if it fell below $60 a share.

The securities-fraud charge claims Stewart misled shareholders by playing down the ImClone investigation to keep her company's stock price from falling.

With the scandal hanging over Stewart's company, revenue the first quarter of the year dropped 15 percent from the same period a year earlier. The company's stock has fallen from $19 to just over $10.

Stewart told The New Yorker in January she has lost about $400 million because of the company's declining value, legal fees and lost business.

Waksal pleaded guilty in the scandal and will be sentenced next week. He could get six to seven years in prison, plus fines.

Waksal has admitted he tipped off his daughter to sell ImClone stock before it plummeted. But he has not implicated Stewart.

Martha Stewart Living Omnimedia reported sales of $295 million last year. The company produces Martha Stewart Living and Martha Stewart Weddings magazines, a newspaper column, a TV show and the Martha Stewart Everyday line of home products, like towels and sheets.

The company's president and chief operating officer, Sharon Patrick, will replace Stewart as CEO. Besides her spot on the board, Stewart plans to stay on as chief creative officer, the company statement said.