Quotes of the Day

Before she was ever an icon or a punch line, a media mogul or an accused felon, Martha Stewart was a person who would stand her ground, no matter what. In 1987, when Stewart was negotiating with Kmart for the licensing deal that would turn her into, literally, a household name, she was just a popular cookbook author—"a nobody," says Paul Argenti, who worked on the project as a consultant to Kmart's CEO. Nevertheless, she stood up to Kmart's top executives, who wanted her to take an exclusive deal with the Lifetime cable channel to help promote the new line. "She's very passionate when she thinks she's right," says Argenti. "She said, 'I can do better than this.' They thought she was crazy." Stewart insisted and eventually landed a spot on NBC's Today show. "She fought tooth and nail for what her image would be like," Argenti says. "And she often won because she was right."

That same resolve—sometimes seen as arrogance—was on display when Stewart stepped into a federal courthouse last week to be fingerprinted, photographed and indicted for obstruction of justice and securities fraud by the U.S. Attorney's office in New York City. Settlement talks had failed, and her lawyers' efforts to win an audience with Justice Department officials in Washington had gone nowhere. In the end, the Financial Times reported, Stewart, 61, would not agree to any plea that required jail time. She walked into the downtown Manhattan courtroom to be charged, as her daughter Alexis, 37, waited quietly on a bench in the back. The nine-count indictment alleges that Stewart altered evidence that she traded on inside information about the biotech company ImClone Systems, conspired with her stockbroker to lie to federal officials investigating the trade and defrauded shareholders in her company, Martha Stewart Living Omnimedia, by misleading them about why she had sold the stock. Her perfunctory responses to Judge Miriam Cedarbaum's questions (Did she understand the charges? Did she need them read aloud?) were barely audible. But when Cedarbaum asked for a plea, Stewart's response—"Not. Guilty."—rang out like a bell, with the first t enunciated in the clipped diction familiar to anyone who has ever followed her instructions to plunge blanched green beans into a bowl of "ice wa-ter."

Once again, Stewart has chosen to fight, but this time more than her image is at stake. If she is found guilty of all the criminal charges, Stewart could face 25 years in prison, $2 million in fines and permanent damage to the company that bears her name and fortune. (She owns 61% of the stock, worth $310 million.) In addition to criminal charges, she faces a civil case brought by the Securities and Exchange Commission (SEC), alleging insider trading. Stewart's lawyers say she "has done nothing wrong" and has become a celebrity scapegoat for more egregious, if less glamorous, corporate criminals. And her many fans agree, including some who say she's being targeted as an uppity woman executive who has made it in a preserve dominated by men. Prosecutors see it differently. "Martha Stewart is being prosecuted not for who she is but what she did," said James Comey, U.S. Attorney for the Southern District of New York. The case against her, experts say, will be difficult to prove but could serve as a deterrent in the government's larger effort to curb abuses of corporate power.

The FBI, the Department of Justice and the SEC have been investigating Stewart since early January 2002, just days after she sold about $228,000 of ImClone stock. It was a decision she made grudgingly, according to testimony given to the SEC by Stewart's broker at Merrill Lynch, Peter Bacanovic, because it meant admitting she was wrong. Bacanovic said he and Stewart had reviewed her entire portfolio in a pre-Christmas session of tax planning and disagreed about what to do with her 3,928 shares of ImClone. "She wanted to hold the stock, and I challenged that by saying, 'The stock has been declining. Why would you hold it? Why are you holding this, considering we sold 50,000 or 40,000 shares months ago?'" Bacanovic said. "I said, 'O.K., if you would not like to sell the stock now, how long are you going to wait before you sell this stock?' ... We determined that $60 a share would be a suitable price, should it ever fall that low. Of course, she never thought it would."

Prosecutors contend that the $60 stop-loss agreement was a false alibi concocted by Stewart and Bacanovic to explain the events of Dec. 27, 2001. Stewart was on her way to a vacation in Mexico, and Bacanovic—then off on his own holiday—had just learned that ImClone co-founder Sam Waksal wanted to sell all the ImClone shares in his Merrill Lynch account, worth $4.9 million. Bacanovic called Stewart's assistant and left the message "Peter Bacanovic thinks ImClone is going to start trading downward."

Had Stewart simply sold on that advice, securities experts say, she probably would not have faced trouble—though Bacanovic might have. But after hearing about Waksal's order, Stewart, ever the micromanager, tried to reach Waksal herself, leaving a message recorded as "Martha Stewart. Something is going on with ImClone and she wants to know what." Although Stewart didn't learn the reason for Waksal's attempted sale—he had been told that the Food and Drug Administration was about to reject an application for approval of ImClone's key drug, Erbitux—she sold her shares and avoided losses of $45,673, the indictment says. Waksal pleaded guilty in October to six counts of securities fraud and obstruction of justice related to his attempted sale. He is scheduled for sentencing this week. In March he partly settled insider-trading charges brought by the SEC.

Insider trading, however, is not the focus of the criminal charges against Stewart and Bacanovic—that is left to the civil charges brought by the SEC. Several defense attorneys and former prosecutors say it would be difficult to make a criminal insider-trading case against the pair because the government would have to prove that Stewart knew the significance of Waksal's sale when she sold the stock. "It's a tricky case," says Greg Markel, a securities-law specialist at Cadwalader Wickersham & Taft in New York City. A broker passing along a tip from one client to another "is not that unusual," says John Teakell, a former SEC litigator in Dallas. (In Bacanovic's case, says a defense attorney, "it probably could have been a lot subtler.")

Instead, federal prosecutors are pursuing the claim that Stewart and Bacanovic lied about the trade and faked evidence turned over to prosecutors. The notes Bacanovic made of the portfolio review, for example, include the notation "@60" next to ImClone in blue ink. Prosecutors say that ink is "scientifically distinguishable" from the blue writing on the rest of the page, so it must have been added to bolster the alibi. "That, a jury can understand," says Martin Pollner, a defense lawyer at Loeb & Loeb in New York City.

Prosecutors say Stewart altered evidence too. The indictment alleges that she changed the message from Bacanovic on her assistant's computer a few days before her interview with the sec, shortly after speaking with her lawyer, and then changed it back.

The most controversial charge against her is securities fraud, legal experts say. When the investigation came to light last June, Stewart made several public statements defending her ImClone trade. She denied that she had received any inside information and said she was simply following the $60 sell arrangement she and Bacanovic had discussed. Comey, the U.S. Attorney, said Stewart made these statements "to stop the slide of the stock price" of Martha Stewart Living Omnimedia and deceived shareholders who otherwise would be worried that insider-trading allegations would damage a company built entirely around the image of its namesake. (The stock indeed rose briefly after Stewart's early statements defending herself but last week was down to $10.24 a share, from $19.01 before the scandal broke.)

"The fraud on shareholders is entirely novel," because it refers to the personal conduct of a corporate officer, rather than company-related conduct, says John K. Carroll, a former securities prosecutor and now managing partner at the law firm Clifford Chance in New York City. While unusual, this charge connects the case to something more than a single stock trade. "It's not just about Martha Stewart's personal fortune," says Robert Mintz of McCarter & English in Newark, N.J. "It's about manipulating the marketplace." The fraud charge also increases the potential prison time; the maximum sentence is 10 years, twice that of the other charges.

Prosecutors acknowledge that with the charges against Stewart they are sending a message to other chief executives. When left unanswered, insider trading "suggests to investors that the game is rigged," says Wayne Carlin, the sec's northeast regional director. If the SEC wins its case against Stewart, she could be barred from serving on the board of any public company, and her role as an officer of Martha Stewart Living Omnimedia would be limited. Mintz, a former federal prosecutor, says it is an accepted principle of prosecution to use celebrated cases in this way. "There's nothing improper in the general deterrent effect," he says.

Stewart stepped down as CEO hours after the indictment was announced, but a company representative says her new title, "chief creative officer," only reflects what she has always done in shaping the Martha Stewart television shows, magazine and home products. "It's business as usual," the representative says. Stewart will continue to appear on the TV shows, and the magazine will continue to be animated with scenes from her carefully crafted life of gracious country glamour. At least one expert on branding suggests that this is the opposite of what the company should be doing—steering Martha Stewart the company away from Martha Stewart the person. "Her face time has got to be cut down," says Donny Deutsch, CEO of Deutsch Inc., part of the Interpublic advertising agency. But Stewart, as usual, is following her own course. The day after her indictment, she took out a full-page ad in USA Today proclaiming her innocence and launched a website, Marthatalks.com, where supporters are encouraged to send her e-mail messages. Argenti, now a professor at Dartmouth's Tuck School of Business, says this is where Stewart excels: "She is a master at communicating with one constituency—her customers." She will now have to try her hand with another one—a jury.

—With reporting by Michael Weisskopf/Washington

• Jyoti Thottam