Investors Flee as Probe Hits Martha

The U.S. Attorney launches a criminal investigation, and an SEC complaint is expected.
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Updated from 10:26 a.m. EDT

Martha Stewart Living Omnimedia

(MSO)

said it has been informed that the U.S. Attorney's Office for the Southern District of New York has launched a criminal investigation against company founder Martha Stewart.

In a press release Tuesday, the company said the U.S. Attorney's Office plans to request that a grand jury return an indictment against her in the near future. Additionally, Martha Stewart Living has received word that a civil complaint by the

Securities and Exchange Commission

is also expected.

The company and its board "have been planning for a number of possible contingencies, are evaluating the current situation and will take action as appropriate."

The press release didn't provide any additional details about the investigation, but Martha Stewart was known to have been friends with Sam Waksal, the former CEO of

ImClone Systems

(IMCLE)

, who resigned last year amid an insider trading scandal involving the company's shares.

Stewart sold nearly 4,000 shares of ImClone in December 2001, shortly before the company said the Food and Drug Administration had refused its application for the cancer drug Erbitux.

The Wall Street Journal

reported last October that the SEC would recommend filing civil securities fraud charges against Stewart for her controversial sale of ImClone stock.

Stewart has stated that she sold her ImClone shares under an existing stop-loss arrangement. The

Journal

also reported in October that federal prosecutors were considering filing criminal charges against Stewart for alleged insider trading, as well as obstruction of justice and making false statements about the reason for her sale.

Shares of Martha Stewart were losing $1.92, or 17%, to $9.28 in midday

New York Stock Exchange

trading.

Charges Seen Soon

The company's statement followed a

Financial Times

report that an indictment was imminent after a last-ditch appeal to senior Justice Department officials in Washington to intervene in the case.

Stewart's lawyers have been engaged in settlement negotiations with federal prosecutors in New York, but they had delayed their response to a proposed plea agreement while trying to gain access to the main Justice Department office in Washington, according to the report.

The report indicated that the Justice Department rejected requests for a meeting late last week, raising the pressure on Stewart to respond to the New York prosecutors' offer.

A televised report on

CNBC

said that charges against Stewart could be brought as early as tomorrow. The report indicated that among the criminal charges were allegations of obstruction of justice. Criminal insider trading wasn't among the charges, but the report said that a civil insider trading action was possible.

One of her lawyers told

CNBC

that "if Martha Stewart is indicted, she intends to declare her innocence and proceed to trial."

Martha Stewart Living's shareholder meeting gets underway today in New York, and the network reported that guards were posted to keep reporters out. According to the televised report, Stewart wasn't planning to attend the meeting.