When prosecutors announced the indictment of Martha Stewart earlier this month, most of their evidence and attention focused on allegations that she obstructed justice by trying to cover up the reason she sold ImClone Systems Inc. stock right before the price sank.
But Stewart may be in greatest peril from a less discussed but highly unusual criminal securities fraud charge. That’s the charge against her that could carry the longest prison term — a 10-year maximum, as opposed to five on the obstruction charges.
Prosecutors allege that she tried to prop up the stock price of her own company, Martha Stewart Living Omnimedia Inc., by issuing news releases that protested her innocence and offered what the government contends is a false explanation for her timely ImClone stock sale.
The allegations of the charge are basically unprecedented, outside legal analysts said, and could become the first big battleground between Manhattan U.S. Attorney Jim Comey’s office and Stewart’s high-priced legal defense team. Both sides were to return to federal court Thursday for a hearing.
Under securities law, public companies and their officers cannot issue false statements about things that are “material” — that could affect the company’s financial health and stock price. The Securities and Exchange Commission and prosecutors often file civil or criminal fraud charges based on company news releases. What makes this securities-fraud charge unusual is that Stewart’s statements were not about her company. Rather, they were about her ImClone stock sales, made in response to news reports of an insider-trading investigation.