By Brooke A. Masters and William Branigin
Washington Post Staff Writers
Friday, March 5, 2004; 6:11 PM

NEW YORK, March 4 -- A Manhattan jury convicted Martha Stewart of conspiring with her broker to obstruct a federal investigation into her personal stock sales, raising a strong possibility that the multimillionaire businesswoman will serve time in prison.

Stewart, 62, was convicted on all four counts of conspiracy, obstruction of justice and lying to federal investigators that she faced in connection with her Dec. 27, 2001, sale of ImClone Systems Inc. stock.

Her former Merrill Lynch & Co. broker, Peter E. Bacanovic, 41, was convicted on the same charges, plus perjury for lying under oath to the Securities and Exchange Commission. But Bacanovic was acquitted on another count of making false documents. All of the charges are felonies.

Stewart and Bacanovic face a maximum of 20 years in prison, but as first time offenders, both are likely to serve far less.

Prosecutors said Stewart and Bacanovic lied to cover up the fact that Bacanovic's assistant, Douglas Faneuil, improperly tipped her that ImClone's founder and CEO, Samuel D. Waksal, was unloading his stock in the company. ImClone announced the next day that its top drug was facing new regulatory trouble, and Waksal is serving seven years in prison for insider trading.

Stewart's conviction is a major victory for the Justice Department's effort to hold top executives responsible for the excesses that contributed to the bursting of the 1990s technology bubble. Coupled with the recent indictments of former WorldCom founder Bernard J. Ebbers and ex-Enron Corp. chief executive Jeffrey Skilling, the Stewart outcome reinforces the message that even wealthy and famous people cannot escape prosecution.

Stewart was stone-faced as U.S. District Judge Miriam Goldman Cedarbaum read the verdict, which came after five weeks of testimony and lawyers' arguments and 14 hours of jury deliberations over three days.

In a statement posted on her Web site, Stewart proclaimed her innocence and vowed to appeal the verdict.

"I am obviously distressed by the jury's verdict but I continue to take comfort in knowing that I have done nothing wrong and that I have the enduring support of my family and friends. I will appeal the verdict and continue to fight to clear my name. I believe in the fairness of the judicial system and remain confident that I will ultimately prevail," she said in the statement on her Web site, marthatalks.com.

"Let this case send an important message: We will not tolerate any sort of corruption in an official proceeding," said interim U.S. Attorney David Kelley whose office brought the case. "If you are John Q. Citizen or Martha Stewart or Peter Bacanovic, we are going to go after you."

Speaking to reporters on the steps of the courthouse, Kelley said the case "was all about lies . . . lies to the FBI and lies to the Securities and Exchange Commission about very important matters." He said the verdict helps to "protect the integrity" of the financial system and avoid "a flood of corruption" that would otherwise undermine public confidence in the stock market.

"The victims in this case [are] the entire American public," who rely on the integrity of the system, Kelley said.

"We will not, and frankly cannot, tolerate dishonesty and corruption" in the system, he said. He said the message to corporate America was: "beware, and don't engage in this type of conduct because it will not be tolerated."

Sentencing in the case was set for June 17.

According to CNN, one male juror said after the verdict, "This is a victory for the little guy. No one is above the law."

Cedarbaum last week threw out the most serious charge -- securities fraud -- against Stewart, ruling that the government had not proved that Stewart lied to influence the stock market in favor of her own company, Martha Stewart Living Omnimedia, Inc.

In their defense, Stewart and Bacanovic claimed they had a standing agreement that her nearly 4,000 ImClone shares would be sold when the share price fell below $60.

The government charged that the story was a cover-up and that Stewart sold the shares because her broker tipped her off through Feneuil that Waksal was trying to unload his own shares.

By selling about $228,000 worth of ImClone shares before ImClone's stock plummeted, Stewart saved about $51,000 -- a relative pittance compared to the vast fortune she has amassed in publishing, television, merchandising and Internet commerce.

Faneuil was the government's star witness in the case. His story of tipping Stewart and then being pressured to lie about it to the SEC was supported by documentary evidence and, in part, by the clearly reluctant testimony of Stewart's former best friend, Mariana Pasternak.

The dual convictions call into question the decision by Stewart's lead attorney, Robert Morvillo, to put on only the briefest of defenses and keep his client off the stand.

The short Stewart defense put more of a burden on Bacanovic's separate legal team. The broker's lawyers made the apparently disastrous decision to call Stewart's business manager, Heidi DeLuca, to say she remembered talking to Bacanovic about a plan to sell at $60 a share, only to have the prosecution show she was hopelessly mistaken about the date and possibly the thrust of the conversation. Bacanovic's team also took the lead on the cross-examination of Faneuil, but struck few blows even though they kept him on the stand for nine hours.

There could be more bad news to come. Stewart still faces civil insider trading charges brought by the SEC, which could seek to have her barred from serving as an officer or director of her company. Such cases customarily settle, but if Stewart decided to fight again, she may face another uphill battle. The government only has to prove the Waksal tip was improper by "a preponderance of the evidence," and Stewart could be forced to testify.

This conviction also gives new weapons to the class-action lawyers who have sued Stewart and the company, alleging she lied about her ImClone sale to prop up the stock price of her own company. Cedarbaum ruled the prosecutors had failed to prove a similar criminal securities fraud charge, but she noted in that opinion that she viewed the "beyond a reasonable doubt" standard for criminal cases as a key part of her decision.

Raised in New Jersey in a family of six children, Stewart learned her homemaking skills from her mother and gardening from her father, according to her Web site. She earned a bachelor's degree in history and architectural history at Barnard College and worked as a model to pay her tuition, then became a stockbroker on Wall Street after graduating. She started on the path that would bring her fortune by developing a catering business in 1972.

Branigin reported from Washington.