Prosecutors Say Martha Lied

One of the key allegations against Stewart is that she changed the substance of a Dec. 27, 2001, phone message from Bacanovic to Stewart's assistant to make it look less incriminating. In the original message, Stewart's assistant had written that Bacanovic "thinks ImClone is going to start trading down." But prosecutors allege Stewart changed the message to simply this: "Peter Bacanovic re imclone."

The alteration could be significant because Bacanovic left the message on the same day that Waksal was unloading his stock. Bacanovic was on vacation at the time but he told his assistant, Douglas Faneuil, to tell Stewart of the Waksal stock sales when she called the office. Prosecutors say that upon getting Bacanovic's message and after talking to Faneuil, Stewart sold all 3,928 shares of ImClone stock she owned for gross proceeds of $228,000.

Stewart made things only worse for herself, prosecutors allege, by then making a series of false statements and explanations for the stock sale to the SEC, prosecutors and investigators with the FBI. One alleged deception was Stewart's statement that she did not recall being told that the Waksals were selling their ImClone stock.

Bounceback

Shares in Martha Stewart Living rose 17 cents Wednesday to $9.69, a day after they plunged 16% amid reports of civil and criminal charges. The stock has lost half its value since the investigations into the ImClone stock sale began.

Merrill fired Bacanovic last summer when the investigation began to heat up. Bacanovic's former assistant, Faneuil, has pleaded guilty to a misdemeanor charge and has agreed to cooperate with prosecutors.

Faneuil reportedly has told prosecutors that he told Stewart of former ImClone Chairman Waksal's attempt to sell much of his stock prior to the release of a negative regulatory ruling on a key cancer-fighting drug. Waksal pleaded guilty to insider trading charges last year. He is scheduled to be sentenced June 10.