By Brooke A. Masters and Ben White
Washington Post Staff Writers
Saturday, March 6, 2004; Page A01

NEW YORK, March 5 -- Martha Stewart, who built a media empire on her sense of domestic style, was found guilty Friday of conspiring with her broker to obstruct a federal investigation into her personal stock sales.

After deliberating for 14 hours over three days, a Manhattan jury of eight women and four men found Stewart, 62, guilty on all four counts she faced of conspiracy, obstruction and lying to federal investigators about her Dec. 27, 2001, sale of 3,928 shares of biotechnology firm ImClone Systems Inc. Last week the judge in the case dismissed a charge of securities fraud.

Stewart's former Merrill Lynch & Co. broker, Peter E. Bacanovic, 41, was found guilty of the same charges and a count of perjury for lying under oath to the Securities and Exchange Commission. Bacanovic was acquitted on a charge of making false documents.

Stewart and Bacanovic, both of whom said they would appeal, could each be sentenced to as long as 20 years in prison. But as first-time offenders, both are likely to serve far less. Under federal sentencing guidelines, lawyers said, Stewart is likely to serve about a year in prison, and could spend some of that time in a halfway house. Sentencing is scheduled for June 17.

Stewart declined to comment upon leaving the courthouse, appearing steady and poised as she pushed through a crowd of onlookers, many of whom cheered, "We love Martha" as she slipped into a gray sport-utility vehicle. In a statement posted on her "Martha Talks" Web site, Stewart continued to assert her innocence.

"I am obviously distressed by the jury's verdict but I continue to take comfort in knowing that I have the confidence and enduring support of my family and friends," she said. "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."

Inside the packed courtroom, Stewart sat stone-faced as U.S. District Judge Miriam Goldman Cedarbaum read the verdict, which followed five weeks of testimony and argument. Stewart's daughter Alexis, who sat behind her mother every day of the trial, gulped and appeared to wipe away tears.

One juror said afterward that the verdict depended on what Stewart did, not who she was. "She's just another human being," Chappell Hartridge said. Although the jurors took some time to reach a verdict, it wasn't because they were deeply divided but because they were being careful, he said. "We know all the attention this was going to get, so we wanted to make sure we did the right thing," Hartridge said.

Stewart's conviction was a major victory for the government in a series of corporate fraud cases brought after the collapse of the stock-market bubble and a wave of accounting scandals.

Coupled with the recent indictments of WorldCom Inc. founder Bernard J. Ebbers and former Enron Corp. chief executive Jeffrey K. Skilling, prosecutors said, the Stewart outcome reinforces the message that even the wealthy and famous cannot escape justice or try to obstruct it.

"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 N. 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."

Stewart's attorney Robert G. Morvillo said outside the courthouse that he was disappointed with the verdict. "We look at this as having lost the first round," he said. "We look at this as an opportunity for us to go to the next rounds and to explain to the Court of Appeals what we think went wrong in this case."

Bacanovic's spokesman Lou Colasuonno said Bacanovic also would appeal. "We are really disappointed in this decision. We think it's the wrong decision," he said. "Peter Bacanovic did not do what the jury thinks he did and we will absolutely appeal this."

Martha Stewart Living Omnimedia Inc., the company Stewart founded, said in a written a statement that the board of directors would meet to evaluate the situation and take appropriate action.

"We are deeply saddened by the news of Martha Stewart's conviction, and our thoughts are with her in this difficult time," the statement said. "The Company believes, in spite of this disappointment, it is important to recognize the significant contributions that Martha has made to advancing the domestic arts and improving the quality of life in and around our homes."

Shares in Stewart's company initially rose Friday in anticipation of the verdict, only to plunge when the jury returned with its decision. The New York Stock Exchange halted trading in the stock shortly before the verdict was announced.

The stock closed the day at $10.86, down $3.17, or 22.6 percent, on heavy volume. Analysts who follow the company said the verdict could prove devastating for a brand so fundamentally tied to a single personality.

It is Stewart's "salesmanship, her poise, her persona that gives the business its competitive advantage," said T.K. MacKay, an analyst with research firm Morningstar Inc. "This will have a very negative impact."

Advertising in Martha Stewart Living, the company's flagship magazine, has plummeted since the investigation became public in June 2002. The company has been trying to develop products that do not bear Stewart's name, and several analysts suggested the company would probably have to change its name to survive.

The government said Stewart sold her ImClone shares on Dec. 27, 2001, because she received an inside tip from Bacanovic's assistant, Douglas Faneuil, that ImClone founder Samuel D. Waksal was unloading his stock in the company.

In bringing their case, prosecutors said Stewart and Bacanovic lied to cover up the reason Stewart sold the shares. But Bacanovic and Stewart maintained that they had am arrangement to sell the shares when they dropped below $60, as they did on Dec. 27.

On Dec. 28, ImClone announced that its top drug, the cancer-reducer Erbitux, was facing new regulatory hurdles. ImClone stock, already declining, began to plunge. Waksal, a close friend of Stewart's, is serving seven years in prison for insider trading. ImClone, however, is thriving. Erbitux won government approval last month as a treatment for colon cancer.

Faneuil was the government's star witness, appearing poised and confident on the witness stand as he recounted the events of Dec. 27 and the subsequent cover-up attempt. 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.

Hartridge, the lone juror who remained at the courthouse after the verdict to speak with reporters, said Faneuil's testimony was critical but not the only basis for convicting Stewart. He said testimony from Stewart's assistant Ann Armstrong also was important. Armstrong said her boss had briefly altered a Dec. 27 phone message from Bacanovic -- just four days before meeting with Securities and Exchange Commission and Justice Department officials.

Hartridge said the jury came to quick agreement on the charges against Stewart. They were less certain of the perjury charge against Bacanovic, asking for instruction from the judge on whether the phone log and Armstrong's testimony counted as the two independent pieces of evidence necessary to convict on the perjury count. Cedarbaum told them that the log and Armstrong's testimony were sufficient.

Jurors declined to convict Bacanovic on the false document charge because they could not determine whether a worksheet that included a notation to sell ImClone at $60 was legitimate or had been fraudulently altered by Bacanovic. The jury heard from conflicting expert witnesses regarding the document and could not decide which expert was correct.

The conviction called into question the decision by Stewart's attorneys to put on only the briefest of defenses. Hartridge said some jurors took offense at the limited nature of the defense, saying it indicated that defense lawyers believed they had "fooled" jurors. "I think something more should have been done to disprove the charges," he said.

The short Stewart defense put more of a burden on Bacanovic's separate legal team. The broker's lawyers made a decision to call Stewart's business manager, Heidi DeLuca, to say she remembered talking to Bacanovic about a $60 plan, only to have the prosecution show she was 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. Faneuil has pleaded guilty to a misdemeanor and awaits sentencing.

Criminal insider-trading charges were not brought against Stewart, but she still faces civil insider trading charges brought by the SEC. The agency could seek to have her barred from serving as an officer or director of a public company. In the civil case, the government has to prove the Waksal tip was improper by only "a preponderance of the evidence," and Stewart could be forced to testify.

The 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 her company's stock price. Cedarbaum ruled that 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 key to her decision.