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Judge Tosses Fraud Charge Against Stewart

Updated from 12:58 p.m. EST

Judge Miriam Goldman Cedarbaum's decision to dismiss criminal securities fraud charges against Martha Stewart on Friday was bold jurisprudence with implications for her civil case, lawyers said.

The count might have been a legal long-shot, but Cedarbaum's dismissal also took the stock market off guard, igniting a short squeeze in Martha Stewart Living (MSO - Get Report) on the single heaviest day of trading in its public history. Shares closed up $1.43, or 10.9%, to $14.53 after touching a 52-week high of $15.25 earlier.

In the securities fraud charge, prosecutors had alleged Stewart's many claims of innocence following her now-famous sale of ImClone Systems stock in December 2001 amounted to a plot to boost shares of Martha Stewart Living.

Of all the charges against Martha Stewart, the securities fraud allegation was most perilous because it carried the most jail time: 10 years.

"In assessing the sufficiency of the evidence, I have concluded that no reasonable juror can find beyond a reasonable doubt that the defendant lied for the purpose of influencing the market for the securities of her own company," Judge Cedarbaum wrote. "Another way of putting it would be that in order to find the essential element of criminal intent beyond a reasonable doubt, a rational juror would have to speculate."

Cedarbaum had previously said the allegation was problematic and relied on a novel interpretation of existing law. The government's case suffered a fatal blow two weeks ago when Cedarbaum refused to let expert witnesses testify on the matter.

Legal observers said Cedarbaum's ruling was daring this late in the trial.

"It took a lot of guts for the judge to dismiss that count at this stage of the proceedings," says defense attorney Labe Richman. "Most judges would have waited for the jury to reach the issue so as to avoid a decision against the government and to protect the government's right to appeal."

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