Martha Stewart Indictment Expected

Media mogul Martha Stewart could be indicted as early as today in the federal insider-trading probe that has dogged her and her company for a year.

Martha Stewart Living Omnimedia Inc. announced Tuesday morning -- just hours before the company’s annual stockholders meeting in Manhattan -- that the U.S. attorney’s office here had notified Stewart’s lawyers that she should expect a criminal indictment “in the near future.”

That could mean today or a week from now, according to two sources familiar with the case. The only surprise, said one, would be if the indictment failed to materialize.

Martha Stewart Living Omnimedia said it also expected the Securities and Exchange Commission to follow through on an earlier threat to file civil securities fraud charges against Stewart.

The company’s stock dropped 15% to $9.52, making it the day’s second-biggest loser on the New York Stock Exchange.

Stewart, the chairwoman, chief executive and controlling shareholder of Martha Stewart Living Omnimedia, skipped her annual meeting, held at a midtown auditorium. In a brief videotape shown to the 75 or 80 attending shareholders, she apologized for being absent but said that under the circumstances, her presence would be a distraction, a company spokeswoman said.

Stewart, 61, would stand out as a glamour target for prosecutors even against a backdrop of recent financial scandals involving high-profile companies such as Citigroup Inc., Enron Corp., WorldCom Inc. and Merrill Lynch & Co.

In last month’s made-for-TV movie “Martha, Inc.” on NBC, actress Cybill Shepherd portrayed the former stockbroker and cigarette ad model as a fire-breathing tyrant who built and rules her domestic arts empire on intimidation and manic energy.

But Stewart’s defenders -- some of them stockholders -- are sticking by her, complaining that she has been singled out for prosecution because she is a famous and successful woman.

“What Martha Stewart did is the corporate equivalent of jaywalking, but they are treating her like she’s guilty of genocide,” read a statement on the “Save Martha!” Internet site created by Stewart loyalists.

Stewart denies wrongdoing and is determined to fight any charges, according to a see-you-in-court statement issued Tuesday by her head criminal lawyer, Robert G. Morvillo. “If Martha Stewart is indicted,” Morvillo said, “she intends to declare her innocence and proceed to trial.”

A federal grand jury in Manhattan has been investigating Stewart’s December 2001 sale of $227,000 in stock in biotech firm ImClone Systems Inc. a day before the Food and Drug Administration rejected the company’s application to sell its experimental cancer drug Erbitux. The news sent ImClone’s shares tumbling.

ImClone was headed at the time by Stewart’s friend Samuel D. Waksal, who has since pleaded guilty to insider-trading charges.

Potential charges against Stewart could include insider trading or obstruction of justice -- both felonies carrying stiff fines and prison terms -- legal experts said.

If there is an indictment, the case probably would not go to trial for at least six months, probably longer, said former federal prosecutor Richard Serafini, a securities law partner at Broad & Cassel in Ft. Lauderdale, Fla.

That leaves open the question of what would happen to Stewart’s business in the meantime.

Stewart’s $295-million empire -- including Martha Stewart Living magazine, her TV show, an online retailing business and a home products partnership with Kmart Corp. -- has been struggling. Her company’s stock has fallen 50% in the last 12 months.

Analyst Laura A. Richardson of Adams, Harkness & Hill said she expected the company to post a 10% drop in sales in the current quarter and to record a loss for the second straight quarter. To cite one problem: Advertising in Stewart’s flagship magazine has plummeted.

“Regardless of the legal outcome with Martha, we think the company needs to articulate a turnaround plan that addresses how it plans to improve its business,” Richardson said.

On the other hand, Martha Stewart Living Omnimedia already has grown accustomed to operating under a cloud, having faced a backlash since Stewart’s legal troubles came to light a year ago, said analyst Douglas Arthur of Morgan Stanley in New York.

In the only official action at Tuesday’s annual meeting, shareholders reelected Stewart and five others to the company’s board.

The company declined to comment directly on speculation that Stewart would step down as CEO in the event of an indictment, saying only that the company and its directors “have been planning for a number of possible contingencies” and would take appropriate action.

The company’s president and chief operating officer, Sharon Patrick, already handles much of the day-to-day operations and could easily step in as acting CEO, analysts said.

Some business experts said Stewart must separate herself from the company to restore the confidence of investors and the public.

“I think she has to step down,” said Michael Kamins, an associate professor of marketing at USC’s Marshall School of Business and an expert on celebrity advertising.

“What she does -- for good or for bad -- reflects on her whole company, not only from Wall Street’s perspective but also from the consumer’s perspective, in terms of trusting her,” he said, adding: “If you can’t trust her because of what she’s done financially, how can you trust what she says?”

Although advertisers tend to shy away from controversy, the typical retail consumer does not, said Kurt Barnard, president of Barnard’s Retail Consulting Group, which forecasts retail industry trends and consumer spending patterns.

“Whatever happens to Martha Stewart, it’s not going to affect retail sales,” Barnard said.

The news came at a bad time for Kmart, the discount retailer that emerged from bankruptcy protection less than a month ago.

As Martha Stewart Living Omnimedia’s exclusive retailer, offering everything from Martha Stewart placemats to Martha Stewart patio furniture, Kmart has counted on Stewart as one of the few bright lights able to draw shoppers into its stores.

“At the moment, this matter remains between the federal government and Martha Stewart,” Kmart said in a statement.

In the last few weeks, the Justice Department and the SEC intensified efforts to obtain a plea agreement from Stewart but faced resistance from her lawyers, said one source familiar with the investigation.

But the fact that prosecutors were unable to reach an agreement could mean the case is not airtight. Investigators have been faced with the difficult task of persuading one or more people close to Stewart to testify against her.

“I’m convinced that they have not all rolled on her or she’d take the plea and run,” the source said.

From the government’s perspective, a successful prosecution of Stewart would have great deterrent value against insider trading because of her fame, Serafini, the former prosecutor, said. By the same token, he said, a loss at trial would leave the government open to charges of wasting resources or unfairly targeting Stewart.

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Mulligan reported from New York, Goldman from Los Angeles. Times staff writer John G. Goldman in New York contributed to this report.