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Martha Stewart to be indicted

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Martha Stewart indicted on 9 counts

Investigators say she lied to the FBI, SEC and investors; but Stewart pleads not guilty

By Jane Weaver

MSNBC

June 4 — Martha Stewart surrendered to federal authorities Wednesday, charged with securities fraud and obstruction of justice in an insider stock trading fiasco that could spell the end of her role as lifestyle icon for millions of Americans. Stewart, appearing in a packed court room, said she was not guilty of the charges, but the ramifications for her merchandising and media empire were already being felt. Late Wednesday, Stewart resigned as chairwoman and chief executive. “I am stepping aside as chairman and CEO because it is the right thing to do,†she said in a statement.

A 41-PAGE INDICTMENT charged Stewart with conspiracy and making false statements. Stewart’s stockbroker, Peter Bacanovic, was charged with perjury and obstruction of justice.

“This criminal case is about lying - lying to the FBI, lying to the SEC and investors,†said U.S. Attorney James Comey during a Wednesday afternoon press conference in New York. “That is conduct that will not be tolerated. Miss Stewart is being prosecuted not because of who she is, but what she did.â€

Stewart, 61, was not charged with criminal insider trading for selling nearly 4,000 shares of the biotech drugmaker ImClone Systems Inc. on Dec. 27, 2001— the reason she was grilled by federal investigators in June 2002.

The scandal surrounds that sale — worth about $250,000 — which occurred just one day before the government issued a disappointing report on an ImClone cancer drug, causing the stock to fall sharply.

The Securities and Exchange Commission Wednesday asked the court to order Stewart and Bacanovic to pay more than $45,000, the amount of money Stewart avoided losing when she sold her ImClone shares. But, more importantly, the SEC, in the civil suit filed in Manhattan Wednesday, sought to bar Stewart from being in charge of any public company.

In its statement late Wednesday, Martha Stewart Living Omnimedia Inc. said Stewart would remain on the company’s board, but not as its chairman. Board member Jeffrey Ubben, the head of a private investment firm and the largest shareholder after Stewart herself, will serve as chairman, and company President Sharon Patrick will become CEO.

THE EVIDENCE UNVEILED

As a result of scientific handwriting analysis conducted by the FBI, Bacanovic was charged with providing a bogus document to investigators. The document—a long list of Stewart’s stock holdings—contained a notation to prompt Stewart to sell her ImClone shares if the stock price dropped below $60. The indictment charges that Bacanovic added the notation in a different pen and at a different time than he used for the rest of the document.

June 4, 2003 — CNBC’s Scott Cohn reports on Martha Stewart’s long climb to prominence in American business and culture.

Stewart claimed to have had an arrangement with her broker for the automatic sale of the stock when it dropped to a certain price.

Stewart was beseiged by camera crews and reporters as she arrived at the federal courthouse in lower Manhattan just before noon Wednesday, wearing a pale khaki-colored trenchcoat and carrying a white umbrella. She did not speak to the media throng when she arrived nor when she departed later in the day after being arraigned before a federal judge and released on her own recognizance.

Key dates in the controversy surrounding the sale of Imclone shares.

June 4, 2003

A federal grand jury indicted Stewart on nine counts in connection with the ImClone Systems Inc. insider trading scandal. Peter Bacanovic, a former Merrill Lynch & Co. stock broker who handled Stewart's account, was charged as well.

June 3, 2003

Martha Stewart Living Omnimedia Inc. says federal prosecutors are seeking a criminal indictment against Stewart "in the near future."

March 4

Stewart's media company reports first-ever quarterly loss amid fallout from investigation.

Oct. 31, 2002

Stewart’s media company reports 42 percent drop in third-quarter profits.

Oct. 21

News reports say Securities and Exchange Commission will file a civil complaint against Stewart.

Oct. 15

Waksal pleads guilty to six counts including securities fraud, bank fraud conspiracy to obstruct justice, perjury. Admits to tipping his daughter to dump ImClone stock, but he does not implicate Stewart.

Oct. 3

Stewart resigns from the board of directors of the New York Stock Exchange

Oct. 2

An assistant to Stewart’s stockbroker pleads guilty to taking a payoff to keep quiet about an alleged insider stock trade and agrees to testify against Stewart.

Sept. 10

The House committee asks the Justice Department to begin a criminal investigation into whether Stewart knowingly lied to lawmakers.

July 24

Martha Stewart Living Omnimedia Inc. halves its third-quarter earnings forecast, acknowledging Stewart’s legal problems are taking a toll on business.

June 12

ImClone founder Sam Waksal is arrested, accused of advising family members to sell their shares before the FDA announcement and of trying to dump his own shares. Stewart denies receiving “improper information†before selling shares.

June 6

House Energy and Commerce Committee, which is investigating ImClone trading, says it is probing Stewart’s stock sale.

Dec. 28, 2001

Food and Drug Administration announces it will not review ImClone’s application for Erbitux, which company touts as promising cancer drug. Disappointing news sends ImClone’s shares plummeting.

Dec. 27

Stewart sells almost 4,000 shares of biotech drug maker ImClone.

In a strongly worded statement Stewart’s lawyer, Robert Morvillo said the domestic doyenne was innocent of all charges.

In the statement Morvillo asked why the government would file the charges after a year and a half of investigation.

“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?â€

Stewart faces up to 30 years in prison and $2 million in fines if convicted on all counts, although sentencing depends on the amount of money involved in the case.

Stewart is a friend of ImClone’s founder Sam Waksal, who is to be sentenced next week in Manhattan federal court after pleading guilty to six counts in the insider-trading scandal. Waksal has not implicated Stewart, and his plea was not part of an agreement to cooperate with prosecutors.

Just this week, a new study conducted in Europe, found Erbitux worked just as well as a cancer treatment as a disputed study conduct earlier, and sponsored by ImClone, said it did.

A COMPANY IN CRISIS

The case against Stewart could drag on for a year or longer before she faces trial, legal experts say.

It had long been rumored that she would step aside as chairman and chief executive of Martha Stewart Living Omnimedia after her indictment to be replaced by president and COO Sharon Patrick.

Executives

Martha Stewart, 61, is chairman and chief executive and owns about 61 percent of the company, controlling most of the voting stock. The company, which was founded in 1997 and began trading on the New York Stock Exchange in 1999, had 2002 sales of $183 million. Other company officers include Sharon Patrick, president and chief operating officer. Patrick has been with the company since 1997.

Publishing

Martha Stewart Living, a monthly lifestyle magazine offering how-to information on cooking, gardening and crafts, was first published by Stewart and Time Publishing Ventures Inc. in 1991. The magazine has 2.1 million subscribers.

Other magazine titles published include Martha Stewart Weddings, Martha Stewart Baby and Martha Stewart Holiday.

Fourteen book titles include “Entertaining,†“Martha Stewart Pies and Tarts,†“Weddings,†“Martha Stewart’s Gardening Month by Month†and “Martha Stewart’s Christmas.â€

“AskMartha†is a New York Times Syndicate newspaper column that is published weekly in more than 235 newspapers in the U.S. and Canada. There is also an “askMartha†radio show distributed to 280 radio stations.

Television

“Martha Stewart Living†television show first aired in 1993 as a weekly program. It ran for four years before becoming a daily program with a weekend edition in 1997. Hosted by Stewart, the show covers a wide range of topics related to home and features segments such as “Cookie of the Week,†“Tip of the Week†and “Cooking 101.†The shows are also broadcast in Canada, Brazil and Japan.

Merchandising

Martha Stewart Everyday is a mass-market brand of household goods sold in Kmart Holding Corp.stores in the U.S., Sears Canada Inc.stores in Canada (effective July 2003) and Seiyu Ltd.stores in Japan. The merchandise includes sheets and towels, cookware, curtains, gardening tools and home-organization products.

Martha Stewart Signature is a higher-end line of goods, including living room and bedroom furniture made by Bernhardt Furniture Co., fabric developed with P/Kaufmann and paint sold at Sherwin-Williams Co.stores.

Internet/Direct Commerce

This division consists of the company’s mail-order catalogs and Web sites, http//www.marthastewart.com and http//www.marthasflowers.com. The catalog sells high-end cookware, linens, tableware and outdoor furniture, among other things.

Stewart’s mess had thrown the company into a financial crisis and raised questions about about who could replace Stewart creatively or on TV if she distanced herself from the company.

King World, the company which syndicates her national show “Martha Stewart Living†declined comment on whether Stewart will continue her hosting duties.

Even though she has been indicted, Stewart was not required to give up her executive role, legal experts said.

However, management consultant Mike Paul had said that the company would be under pressure to force Stewart to step down.

“This goes beyond Martha Stewart the person,†said Paul, adjunct professor of communications at New York University. “This deals with corporate governance and the Board’s fiduciary responsibility. There is a huge difference between a court of law and the court of public opinion.â€

Public opinion seems to be divided on the woman whose reputation as an aesthetic taste-maker is intricately linked with her company. Martha Stewart Living Omnimedia includes her magazines, the Martha Stewart Everyday product line for K mart, her TV shows, a radio program, a Web site and catalog business and a weekly newspaper column.

On one hand consumer brand expert Robert Passikoff says “her image as a trustworthy brand has taken a hit†with consumers since the scandal hit the press.

MSO shares have plunged since the scandal broke, advertising revenues at her magazine “Martha Stewart Living†have dropped 30 percent since the beginning of the year and ratings for her TV show have declined.

Revenue in the first quarter of the year dropped 15 percent from the same period a year earlier.

However, sales of her merchandise have held up at retail, even though hundreds of K mart stores have closed.

“The consumer can distinguish between Martha the person and the products which are well-designed and well-priced in the store,†said Neil Stern, partner of Chicago retail consultant McMillan Doolittle. “The products have demonstrated the ability to overcome adversity.â€

Even before the stock trading crisis hit, the company had begun transitioning away from its overwhelming dependence on Stewart as the sole image of the brand. It’s been three years since she appeared on the cover of the magazine. A digest-sized cooking and recipes magazine “Everyday Day†which avoids any mention of her name has tested positively on newsstand since January. And a syndicated pet care show, “Petkeeping with Marc Morrone,†is launching in September along with a Web site and a line of pet merchandise.

The company can survive if it distances its product lines and image from Stewart, said Passikoff.

“If they’re smart, they’ll sell the products based on their attributes and value,†he said. “But it’ll never be the brand it was.â€

In the press conference Wednesday attorney Comey call Stewart’s case “a tragedy†for her company that employees hundreds of people.

“It is a tragedy that could have been prevented if these two had done what parents

have counseled their children for eons—if you have done something wrong, lying is not the way out,†said Comey.

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