Prosecutors Say Martha Lied

Updated from 3:29 p.m. EDT

Calling the season's biggest Wall Street scandal a "tragedy," federal prosecutors charged Martha Stewart and her stockbroker, Peter Bacanovic, with nine felony counts Wednesday, saying a conviction could mean jail time. Both defendants pleaded innocent.

Wednesday evening, Stewart announced she would step aside as CEO and chairwoman of Martha Stewart Living(MSO - Cramer's Take - Stockpickr). She will remain a board member and serve as chief creative director.

A day after she missed her company's annual meeting, Stewart appeared at the federal courthouse in Lower Manhattan on a rainswept afternoon. Stewart and Bacanovic, a former Merrill Lynch broker, now face charges stemming from her sale of some 4,000 shares of ImClone Systems just before the biotech stock plunged in December 2001.

Wednesday's 41-page indictment charges both Stewart and Bacanovic with conspiracy, obstruction of justice and making false statements. Bacanovic is also charged with perjury, accused of giving false testimony under oath to the Securities and Exchange Commission. Stewart, meanwhile, is charged with securities fraud.

If convicted of all the criminal charges, Stewart faces up to 30 years in jail and fines of up to $2 million. Meanwhile, Bacanovic faces 25 years in prison and fines of up to $1.25 million. Stewart faces additional sanctions and fines under an SEC civil prosecution.

The charges capped a 16-month-long investigation. Ahead of the defendants' pleas, a highly polished news conference saw prosecutors distill the nine counts against Stewart and Bacanovic to one overarching alleged misdeed.

"This criminal case is about lying," U.S. Attorney James Comey told reporters at the midafternoon news conference. "Lying to the FBI, lying to the SEC and lying to investors. ... This is a tragedy that could have been prevented if only these two had done what parents have taught their children for eons."

Stewart's lawyer, Robert Morvillo, issued a statement asserting Stewart's innocence and denouncing prosecutors for using her public remarks about the controversy as the basis for the securities fraud allegation.