Judge Refuses to Dismiss Two Charges Against Martha Stewart

A federal judge rejected on Tuesday a request by Martha Stewart to dismiss two of the five criminal counts against her, ruling that the lifestyles entrepreneur must stand trial in January on charges of securities fraud and obstruction of justice.

The fraud charge alleges that Stewart lied to investors in her company, Martha Stewart Living Omnimedia Inc., after news first surfaced in June 2002 that she may have illegally sold shares of biotechnology company ImClone Systems Inc. Stewart told investors she had no inside information when she sold her ImClone stock, a claim that the Securities and Exchange Commission has disputed in a civil case against her.

In an afternoon hearing in lower Manhattan, U.S. District Judge Miriam Goldman Cedarbaum conceded that the fraud charge was a “novel application of the securities laws,” but she disputed arguments by Stewart’s lawyers that it violated her free-speech rights.

“Such false factual statements are not protected by the 1st Amendment,” Cedarbaum told a courtroom packed with lawyers and reporters.

Stewart’s lawyers argued in court papers that Stewart’s public statements were simply proclamations of her innocence and were not an attempt to prop up the stock of her company by denying that an investigation was underway.

“Ms. Stewart’s June statements did not deny that she was being investigated or that such accusations were being made,” her lawyers wrote in court papers filed Friday. “They did assert her belief in her innocence and the reasons for that belief.”

Cedarbaum also refused to dismiss the obstruction charge, saying the indictment “contained a significant amount of factual detail” supporting it.

Stewart can renew the dismissal request after the government presents its case at trial, Cedarbaum said.

The trial is scheduled to begin Jan. 12, but opening arguments probably won’t start until later in the month because of the lengthy time it will take to pick a jury for the expected six-week trial, Cedarbaum said.

Stewart sat on the edge of her chair with her hands folded while Cedarbaum delivered her ruling.

Cedarbaum also rejected a request by Stewart’s former stockbroker -- Peter Bacanovic, who was indicted along with Stewart -- to have his trial separated from hers. He had argued that the negative publicity surrounding Stewart could impair his chances for a fair trial, but Cedarbaum said the charges against Bacanovic were “inextricably associated” with those against Stewart, and that it made sense to try them together.

Stewart was indicted in June on charges of conspiracy and making false statements to investigators, in addition to the fraud and obstruction counts. If convicted on all charges, she could face a maximum penalty of 30 years in prison and $2 million in fines.

The charges stem from Stewart’s December 2001 sale of 3,928 shares of ImClone stock. The $228,000 stock sales came just a day ahead of an adverse ruling by the Food and Drug Administration on ImClone’s proposed cancer drug, Erbitux. The stock plunged 18% on the news.

The indictment alleges that Bacanovic sought to warn Stewart about the FDA ruling after he learned that Samuel D. Waksal, who was ImClone’s chief executive and a close friend of Stewart’s, was trying to sell large amounts of ImClone shares ahead of the FDA announcement.

Stewart and Bacanovic claimed she had a standing order to sell her ImClone stock if the price fell below $60 a share. But the government said they devised the story and altered records to hide their activity.

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Bloomberg News was used in compiling this report.