Martha Stewart’s Legal Woes Grow

Martha Stewart took shots from three sides Monday -- in court, in a news magazine and on television.

In federal court in Manhattan, a U.S. judge declined to dismiss a lawsuit by shareholders of Martha Stewart Living Omnimedia Inc., even as Newsweek reported Stewart may be indicted and NBC prepared to televise a less-than-flattering movie about her.

Shares of Martha Stewart Living Omnimedia fell more than 7% Monday, erasing most of last week’s hefty gains.

The lawsuit charges that Stewart, who is chairman and chief executive of Martha Stewart Living, and other company insiders sold stock before the public became aware that Stewart was the subject of investigations by federal authorities.

Those investigations, undertaken by the Securities and Exchange Commission and the Justice Department, have looked into Stewart’s sale of nearly 4,000 shares of ImClone Systems Inc. in December 2001, just before ImClone’s stock fell on disappointing news about a cancer drug.

Newsweek magazine also reported Monday that the U.S. attorney in Manhattan is “still strongly considering indicting” Martha Stewart on charges of insider trading and obstruction of justice in the ImClone case.

What’s more, NBC was set Monday to air a made-for-TV movie about Stewart’s rise to become one of the most successful businesswomen in America.

Stewart’s company has been ravaged by an investigation into her sale of ImClone shares.

Martha Stewart Living Omnimedia stock fell 85 cents Monday to close at $10.61 on the New York Stock Exchange.

In a packed courtroom in lower Manhattan, lawyers representing Stewart, her company and other executives asked the federal judge overseeing the case to dismiss the lawsuit.

Judge John Sprizzo rejected the request, setting a Nov. 24 date for the start of pretrial hearings.

The lawsuit alleges that Martha Stewart Living insiders sold about 5.3 million shares, making more than $79 million in illegal profits and avoiding losses they would have suffered if the public had known in advance about investigations into Stewart’s sale of ImClone stock.

Filed by the major shareholder plaintiffs’ firm Milberg Weiss Bershad Hynes & Lerach, the case was brought on behalf of investors who bought Martha Stewart Living stock from Jan. 8 to July 24, 2002. Plaintiffs allege that Stewart started selling her own company’s stock on Jan. 8, when she sold 3 million shares in a private, undisclosed sale.

The suit further alleges that on March 2 and again on May 2 last year, Martha Stewart Living executives sold millions more of their shares in the company at prices as high as $20 a share.

“As we said previously, the company is confident that the allegations asserted against the company in the shareholder litigation are completely without merit,” a spokeswoman for Martha Stewart Living said.