Stewart Guilty of All Counts

Updated from 4:35 p.m. EST

Martha Stewart, who created a media empire and made her name a household word, was found guilty Friday of obstruction of justice, conspiracy and two counts of making false statements to investigators, handing the government its biggest financial markets conviction since Michael Milken was locked up in 1990.

The conviction of Stewart, 62, marks a stunning reversal for an executive who had, until now, been known for her savvy, cunning and sheer hard work in building her media company.

Stewart faces up to five years in prison on each count, although federal guidelines could reduce the prison time to a mere fraction of that total.

Sentencing is set for June 17.

The future of her company, Martha Stewart Living Omnimedia ( MSO), appears in peril. Shares were halted just before the verdict was read, after spiking to a 52-week high of $16.27 in the minutes leading up to it. The stock closed at $10.86, down $3.17, or 22.59%.

True to her reputation as a determined executive, Stewart -- sometimes to the point of being imperious -- wasted no time in proclaiming that she would appeal today's verdict.

In a statement on her Web site, www.marthaspeaks.com, she said: "I will appeal the verdict and continue to fight to clear my name. I believe in the fairness of the judicial system and remain confident that I will eventually prevail."

Stewart's former Merrill Lynch broker, Peter Bacanovic, 41, also was convicted Friday of conspiracy, one count of making false statements, obstruction of justice and perjury, but he was cleared on one count of making and using false documents.

The government had brought the case against Stewart and Bacanovic over her Dec. 27, 2001, sale of 3,928 shares of ImClone Systems ( IMCL), shares that cratered one day later on news of a Food and Drug Administration setback.

Stewart's trial focused public attention on the use of privileged information in stock trading and is the latest dose of justice in a long list of executive scandals that have plagued U.S. financial markets for three years.

Stewart and Bacanovic showed no emotion when the verdict was read in federal court in downtown Manhattan. Bacanovic also reportedly plans to appeal the verdict.

Stewart became famous for a syndicated television program in which she provided fastidious advice on elegant cooking and home decorating. The company she founded faced an uncertain future with Stewart facing prison time.

The jury in the case needed three days to return the guilty verdict after roughly one month of testimony in which Stewart was said to have received a tip at Bacanovic's behest shortly before unloading her ImClone stake. The two were convicted of concocting a story that Stewart sold the shares under an informal stop-loss agreement that kicked in around $60.

Jurors evidently were persuaded the story was a lie by the testimony of Bacanovic's assistant, Douglas Faneuil, who claimed he was ordered to phone Stewart with news of panicked ImClone selling by the family of its founder, Sam Waksal. Waksal, who had learned the FDA planned to reject ImClone's application on a key cancer drug, is already doing a seven-year prison sentence after pleading guilty to insider trading in October 2002.

Other damaging testimony included an account by Stewart's personal assistant, Ann Armstrong, that the domestic entrepreneur sat in her chair on Jan. 31, 2002, and altered a phone message from Bacanovic warning ImClone was headed for a fall. According to Armstrong, Stewart subsequently ordered her to change the message back before stepping into a meeting with her son-in-law lawyer, John Cuti.

Armstrong recalled the message as "Peter Bacanovic believes ImClone is going to start trading lower."

Stewart's stop-loss story was also subverted by the testimony of Mariana Pasternak, her traveling companion in the last days of 2001. The Westport, Conn., real estate agent said Stewart claimed during a Mexican vacation to have known about Waksal's selling prior to making her own trade.

Pasternak quoted Stewart saying of Bacanovic: "Isn't it nice to have a broker who tells you these things?"

Pasternak later described the recollection as possibly imaginary, but the testimony was damaging and helped prosecutors paint a picture of Stewart as an aloof and frequently petty executive who acted without regard for her stockholders.

The conviction is a humiliating defeat for Robert Morvillo, the famous criminal defense lawyer who represented Stewart. Morvillo took a gamble calling just one witness in his client's defense, hoping the government's case was weak enough that it wouldn't convince the jury beyond a reasonable doubt.

Speaking to reporters after the verdict was read, a male juror from the trial, Chappell Hartridge, said Morvillo "did the best he could with what he had to work with."

"If Bacanovic's message would've said that 'ImClone stock is below 60, are you ready to sell?' that would be fine," said Hartridge, a computer technician from the Bronx.

Bacanovic was portrayed in the trial as a socially mobile opportunist who broke the law in an effort to curry favor with his most famous client. According to Faneuil, his well-paid boss made it clear the Merrill Lynch office was prepared to cover up the trade and intimidated his assistant into going along with the story.

Faneuil testified under an agreement with prosecutors under which he will be charged with a misdemeanor. Defense lawyers tried in vain to discredit the 28-year-old as an occasional drug user who was both seduced and repulsed by Stewart's celebrity, at one point saying of himself that, "Baby put Miss Martha in her place," after snapping back at her in a telephone conversation.

Stewart was spared a more serious prison sentence when Judge Miriam Goldman Cedarbaum dismissed charges of securities fraud against her, saying the government failed to make its case. That charge centered on a theory that Stewart's many claims of innocence amounted to a plot to prop up shares of Martha Stewart Living in the months after the ImClone trade became publicized.

Minutes after the verdict was read, Bacanovic's mother said tearfully outside the courtroom that her son had "lost his career, his job, he's lost time and he had no motives."

Investors in Stewart's namesake company now face the thorny question of whether the company can survive with its founder behind bars. Stewart's name and personality had previously been inextricably linked to the company, which has operations in publishing, television and catalog sales. The burden of defending both Stewart and the company from bad publicity has weighed on the bottom line for more than a year and could become too much to bear in the wake of the conviction.

The conviction is a major victory for federal prosecutors who were criticized for failing to secure a guilty verdict in the case of Frank Quattrone, the former Credit Suisse First Boston investment banker accused of obstructing a Justice Department investigation into IPO allocations. Many critics also had doubted the viability of the Stewart prosecution, which turned on testimony about brief conversations that occurred three years ago and circumstantial deductions about the motives of its chief players.

Prosecutors now have another high-profile hide to nail up in the interest of warning other would-be scofflaws away from illicit stock trading, a process started with Waksal's imprisonment. Insider trading, a common crime during the late 1980s bull market that climaxed in the conviction of Drexel Burnham trader Milken, has taken a back seat in recent years as prosecutors have focused on accounting scandals like those at Enron and WorldCom.

Wheels of Justice
Key events of the trial

Jan 26
MSO Close $13.25. Jury of eight women, four men picked for trial.
Jan 27 MSO Close $12.84. In opening arguments, prosecutors say Stewart and Bacanovic made "a decision to lie and come up with a cover-up" for the ImClone sale. Defense lawyer Robert Morvillo says "No witness will come into this courtroom and say that 'Martha asked me to do something unlawful.'"
Jan 29 MSO Close $12.91. Douglas Faneuil's testimony is postponed after defense lawyers receive a document showing he gave his original lawyer differing accounts of the events surrounding the Dec. 27, 2001, stock sale.
Feb. 2 MSO Close $12.90. Faneuil's testimony is rescheduled after the judge chalks up the differing accounts to the lawyer's hazy memory.
Feb. 3 MSO Close $12.50. Faneuil testifies, "I told one client about what another client was doing with his account and lied about it to cover up."
Feb. 4 MSO Close $12.30 Under intense cross examination, Faneuil repeats that he was intimidated to join in a conspiracy with Bacanovic and Stewart to conceal from SEC investigators what happened the day of Stewart's sale.
Feb. 5 MSO Close $12.28. Defense lawyers introduce an email in which Faneuil says of himself, "Martha yelled at me again today, but I snapped in her face, and she actually backed down! Baby put Miss Martha in her place." Feb. 9 MSO Close $12.08. Faneuil says he has a "word-for-word" recollection of his telephone conversation with Stewart the day she made her ImClone trade.
Feb. 10 MSO Close $11.55. Ann Armstrong, Stewart's personal assistant, tells jurors how her boss sat in her chair and retyped a Dec. 27, 2001, message about the biotech company to make it look less like a stock tip.
Feb. 11 MSO Close $11.90. Prosecutors play a lengthy tape in which Bacanovic is heard to give government lawyers an account of the trade that is different from Armstrong's account.
Feb. 12 MSO Close $11.80. Prosecutors are barred from calling expert witnesses who would testify that Stewart's many claims of innocence amounted to a plot to mislead investors in her own company.
Feb. 20 MSO Close $12.49. Traveling companion Mariana Pasternak says Stewart claimed to know about the frantic efforts of ImClone founder Sam Waksal to unload his company shares earlier that month. "She said, 'Isn't it nice to have a broker who tells you these things?'" testifies Pasternak. Government rests its case.
Feb. 23 MSO Close $12.70. Pasternak says she might have imagined the conversation. Later, Stewart aide Heidi Deluca says Bacanovic called ImClone "a dog" that should be unloaded at $60.
Feb. 24 MSO Close $13.10. Prosecutors suggest Deluca is conflating two conversations with Bacanovic, both of which occurred on dates that ImClone was trading at $61.52.
Feb. 25 MSO Close $13.28. Defense rests. Prosecutors play tape in which Bacanovic is asked, "Did you talk to Heidi at all about, you know, 'Martha Stewart told me that once the stock hits $60, I should sell?'" He replies: "I don't get into that level of detail with Heidi."
Feb. 27 MSO Close $14.53. Judge dismisses securities fraud charges against Stewart, ruling no reasonable juror could find her guilty of that charge.
March 1 MSO Close $13.92 Stewart's fate should turn on the believability of Faneuil, lawyers for both sides contend in closing arguments.
March 2 MSO Close $13.80. Trial goes to jury.
March 5 MSO Close $10.86. Stewart and Bacanovic are convicted of obstruction and making false statements.

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