What's Cooking at the Martha Trial

With the high-profile homemaker about to have her day in court, here's a guide to the key issues facing judge, jury, and defendants

The saga surrounding domestic doyenne Martha Stewart's controversial ImClone (IMCL ) stock sale is entering its final chapter. Federal prosecutors and Stewart's defense attorneys have begun the critical process of picking jurors for the United States of America v. Martha Stewart and Peter Bacanovic trial. Bacanovic, her former Merrill Lynch (MER ) broker, is also on trial, charged with conspiracy and lying to investigators.

Opening arguments are expected later this month, and the proceedings could last several weeks. What's at stake? Plenty. Here's BusinessWeek Associate Editor Diane Brady's review of the issues and possible outcomes:

How do you find an impartial jury for a trial like this?

Obviously, neither side expects -- and may not even want -- to find people who have never heard of Martha Stewart. Their goal is to find people who don't have obvious conflicts of interest or strong views that would predispose them to a certain outcome. Right now, they're asking everyone to fill out questionnaires, which is fairly common in high-profile cases.

Based on those questionnaires, lawyers have to tell the court who they want to exclude. A much smaller pool of jurors will return to federal court on Jan. 20 to face additional questions from defense attorneys and prosecutors, and a final panel of 12 will then be chosen. The trial itself should start about a week later.

Is Martha likely to take the stand in her own defense?

While her lawyer, Robert Morvillo, says he hasn't decided whether to call her as a witness, it seems likely that Stewart will take the stand. She's an articulate and increasingly sympathetic figure who has already been making her case in the media. She'll have to contend with a cross-examination that could be brutal, aimed at exposing inconsistencies in her story. But Stewart has little choice. Refusing to take the stand after pouring her heart out to Barbara Walters, Larry King, and even this reporter (see BW Online, 6/26/03, "Martha's Everyday Plans and Beyond") would look odd, at the very least.

What exactly is Stewart up against?

On Jan. 5, prosecutors issued a "superceding" or revised indictment that reinforced the charges. It's worth noting that the nine counts leveled against Stewart and Bacanovic don't include insider trading -- which was what prompted the investigation in the first place. (Separately, the Securities & Exchange Commission has charged her with insider trading.) Instead, the U.S. Attorney has accused her of conspiracy to obstruct justice, commit perjury, and make false statements, as well as charges of making false statements, obstruction of justice, and securities fraud.

How strong is the government case?

While the definition of insider trading was always somewhat of a stretch in this case -- Stewart was never accused of speaking to a company insider, just trading on a tip from her broker who may or may not have known exactly why ImClone's CEO was dumping his shares -- the other charges are fairly clear. The government will cite evidence from altered phone records and will offer evidence of a worksheet changed using a different pen.

Furthermore, prosecutors have a cooperative witness -- Bacanovic's assistant, Douglas Faneuil -- who disputes the statements of both defendants. Lying to investigators is a crime, and the government feels it has ample evidence to prove Stewart and her broker were lying.

A more controversial charge is that of securities fraud, which Stewart's lawyers unsuccessfully tried to have dropped. Prosecutors are arguing that because the success of Martha Stewart Living Omnimedia (MSO ) is so intertwined with the personal reputation of its founder, Stewart's allegedly "false and misleading" statements to uphold her reputation were tantamount to securities fraud. While few would dispute the notion that Stewart's reputation has a direct impact on her brand, her efforts to defend herself might not rise to the level of securities fraud. Even the judge presiding over the case, Miriam Goldman Cedarbaum, called the charges "novel" when refusing to drop them in November.

What, if anything, is likely to work in Stewart's favor?

One thing is public sentiment, which seems be changing. Since the allegations first surfaced in June, 2002, Stewart has gone from being vilified to being portrayed as more of a victim. Instead of haughtily brushing off charges and refusing to answer questions, as she did on The Early Show while wielding a knife to chop up a now-infamous salad, Stewart has since pursued a humbler public image. While she still maintains that she did nothing wrong, the domestic doyenne is more open and more thankful for public support.

Moreover, Joe and Jane Public seem increasingly to feel that Stewart has paid a costly price already for a stock trade that netted her about $50,000 in allegedly ill-gotten gains. She has personally lost millions of dollars and been forced to step down as chairman and CEO of her own company. Those unflattering photos in the tabloids must have stung, too.

Stewart is also coming to trial at a time when people accused of far more egregious corporate crimes are heading to court. When compared with the masterminds of the Enron (ENRNQ ) or WorldCom (WCOEQ ) scandals, Stewart's actions may seem especially trivial in the eyes of a jury. If acquitted or handed a suspended sentence, Stewart is no doubt hoping to whip up a fast comeback with legions of disillusioned fans. But first she'll have to convince a dozen jury members that she told the truth about the circumstances surrounding her suspicious stock sale.

The trial of the century? Probably not. But many people feel strongly about one of the defendants. And given public sentiment and how much Stewart has already suffered for her alleged crimes, many feel that her chances of acquittal on some or even all of the charges are strong.

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