'Smart lady ... dumb mistake'

They say that bad news comes in threes-but not if you're Martha Stewart. The domestic diva got her bad news in fours on March 5, when a New York jury found her guilty on all four counts of conspiring with her broker to deceive federal authorities investigating her questionable stock trades.

It was a stunning setback for the working-class girl who turned a simple catering business into a multibillion-dollar empire selling the good life to the masses. Despite again declaring her innocence on her internet website and promising an appeal, Ms. Stewart faces a year or more in prison when she is sentenced on June 17. Meanwhile, the value of her company dropped to less than $500 million, compared to a high of more than $2 billion in 1999. Ms. Stewart still owns 60 percent of her company's stock, but the board of directors was expected to force her off the board following her conviction.

As calamitous as the decision was for Ms. Stewart personally, it may say even more about the public's attitude toward big businesses and the highly paid executives who run them. The verdict, according to one juror, was a victory for "the little guys." It was also a surprising validation for government prosecutors, giving them new momentum in a half-dozen high-profile cases scheduled for later this year (see sidebar).

Although Ms. Stewart was by far the best-known of the defendants, thanks to her inescapable presence on TV and newsstands, her crimes were less far-reaching than many of her fellow executives'. Her trouble started in late 2001, when Douglas Faneuil, an assistant to her stockbroker, called to say that insiders at pharmaceutical maker ImClone were quietly dumping their shares after the Food and Drug Administration failed to approve the company's new cancer drug. Ms. Stewart dumped her shares too, saving her from a piddling (by comparison) $50,000 in losses when news of the FDA decision became public.

To the government, that constituted a clear case of insider trading. But Ms. Stewart and her broker insisted that they had long had an agreement to sell her ImClone stock if the price ever dropped below $60 a share.

The jury didn't buy that story, however. For one thing, Ms. Stewart called Samuel Waksal, ImClone's CEO, just moments after selling her shares, suggesting an unusually cozy relationship. With federal investigators closing in, she tried to alter her phone logs, according to her own assistant, in order to delete a call from her broker. And then there was the reluctant testimony of her longtime friend, Mariana Pasternak, who was traveling in Mexico with Ms. Stewart at the time of the sale and recalled hearing her say, several days later, "Isn't it nice to have brokers who tell you these things?"

Faced with such evidence, it took the jury just 14 hours to convict Ms. Stewart on all counts after a trial that lasted six weeks. The verdict came as a shock: Ms. Stewart showed little emotion, but her daughter, Alexis, leaned forward in her chair and wept. Even one of her lawyers was seen wiping tears from his eyes.

The markets, too, reacted with surprise. Expecting a verdict of not guilty, traders had bid up the price of Martha Stewart Living Omnimedia by more than 15 percent in the one hour prior to the jury's return. Following the announcement, the stock collapsed, wiping some $300 million in value off the books.

Many legal experts said the Stewart legal team erred by mounting a casual defense that called only one witness, gently cross-examined key prosecution witnesses, and refused to put Ms. Stewart herself on the stand. Experts also agreed that an appeal to the 2nd Circuit was a longshot, since the legal hurdles are high. Lawyers would have to show that Judge Miriam Goldman Cedarbaum abused her discretion by limiting defense testimony or disallowing exculpatory evidence. Because the defense team barely bothered to present a case, they'll probably have a hard time making that argument, and an appeal will serve only to delay the start of Ms. Stewart's jail term.

Despite their verdict, the jurors themselves seemed sorry about Ms. Stewart's likely fate. "We felt that she was a smart lady who made a dumb mistake," said jury forewoman Rosemary McMahon.

"We all felt terrible about it at the end," agreed fellow juror Meg Crane. "It felt like such a foolish mistake that was increased as it went along."

Defendants like Jeffrey Skilling and Dennis Koslowski won't get that kind of sympathy. Their alleged corporate crimes affected thousands of employees who lost their jobs and millions of shareholders who lost billions of dollars because of shady accounting practices and other stock manipulations.

Ms. Stewart, on the other hand, simply got greedy, trying to save $50,000 in a fortune that approached $1 billion. She never misled her shareholders or tried to artificially inflate the value of her company. Her real crime, lying to federal investigators, was the same charge at the heart of the Monica Lewinsky scandal. Unlike Ms. Stewart, however, Bill Clinton never lost his job-much less served time in prison.

Justice may be blind, but it's hardly apolitical.