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Instead, federal prosecutors are pursuing the claim that Stewart and Bacanovic lied about the trade and faked evidence turned over to prosecutors. The notes Bacanovic made of the portfolio review, for example, include the notation "@60" next to ImClone in blue ink. Prosecutors say that ink is "scientifically distinguishable" from the blue writing on the rest of the page, so it must have been added to bolster the alibi. "That, a jury can understand," says Martin Pollner, a defense lawyer at Loeb & Loeb in New York City. Prosecutors say Stewart altered evidence too. The indictment alleges that she changed the message from Bacanovic on her assistant's computer a few days before her interview with the SEC, shortly after speaking with her lawyer, and then changed it back.
The most controversial charge against her is securities fraud, legal experts say. When the investigation came to light last June, Stewart made several public statements defending her ImClone trade. She denied that she had received any inside information and said she was simply following the $60 sell arrangement she and Bacanovic had discussed. Comey, the U.S. Attorney, said Stewart made these statements "to stop the slide of the stock price" of Martha Stewart Living Omnimedia and deceived shareholders who otherwise would be worried that insider-trading allegations would damage a company built entirely around the image of its namesake. (The stock indeed rose briefly after Stewart's early statements defending herself but last week was down to $10.24 a share, from $19.01 before the scandal broke.)
"The fraud on shareholders is entirely novel," because it refers to the personal conduct of a corporate officer, rather than company-related conduct, says John K. Carroll, a former securities prosecutor and now managing partner at the law firm Clifford Chance in New York City. While unusual, this charge connects the case to something more than a single stock trade. "It's not just about Martha Stewart's personal fortune," says Robert Mintz of McCarter & English in Newark, N.J. "It's about manipulating the marketplace." The fraud charge also increases the potential prison time; the maximum sentence is 10 years, twice that of the other charges.
Prosecutors acknowledge that with the charges against Stewart they are sending a message to other chief executives. When left unanswered, insider trading "suggests to investors that the game is rigged," says Wayne Carlin, the SEC's northeast regional director. If the SEC wins its case against Stewart, she could be barred from serving on the board of any public company, and her role as an officer of Martha Stewart Living Omnimedia would be limited. Mintz, a former federal prosecutor, says it is an accepted principle of prosecution to use celebrated cases in this way. "There's nothing improper in the general deterrent effect," he says.