NEW YORK, March 7 — Newsweek magazine has learned that the Feds gave Martha Stewart an opportunity to avoid prison. Federal prosecutors offered Stewart a deal last April to cop to one count of making a false statement, say several sources familiar with the offer. She would have received probation and could continue working at her company, they say. But she refused to plead guilty to a felony, and a defense source says the Feds couldn’t guarantee she would stay out of jail.
And federal investigators say she could have avoided the entire mess if she had confessed in the beginning. Had she admitted wrong doing in early 2002, she could have gotten off with a $200,000 fine and no jail time, report Detroit Bureau Chief Keith Naughton and Special Correspondent Barney Gimbel in the March 15 issue of Newsweek (on newsstands Monday, March 8).
After a seven-week trial, the jury deliberated for three days before convicting Stewart on all four counts. One juror sobbed as the judge ticked off all the guilty counts. Martha’s daughter, Alexis, doubled over in tears in the front row of the gallery. Alexis’s husband John Cuti, also one of Martha’s lawyers, buried his face in his hands at the defense table. Stewart stared straight ahead, showing no emotion.
Martha Stewart’s case may set the new standard for judging fat cats who don’t play by the rules, write Naughton and Gimbel. “We’re now going to see the ‘Martha test’ as a fair punishment for white-collar crimes,” says Jeffrey Sonnenfeld, associate dean of the Yale School of Management. “This is going to have a strong influence on jurors from here on out.” And legal experts say she’ll likely go to prison for one to three years, probably at a minimum- security “prison farm.”
After the judge rattled off the guilty-on-all-counts verdict last week, Martha Stewart couldn’t get out of the courtroom fast enough. With her mood suddenly as black as her smart pantsuit, she bolted the scene of her undoing, her teary daughter, Alexis, trailing her. But what awaited the convicted felon in the marble hallway of the courthouse must have been a second shock. Crowded behind a hastily arranged rope line were courthouse workers, photo IDs dangling from their necks. They weren’t there to frown upon the disgraced domestic diva. Instead, they offered polite applause as Stewart walked briskly by, her head bowed and face obscured by her dangling blond locks. When Martha emerged from the courthouse, she encountered more fans, straining against police barricades, chanting, “We love you, Martha.” But there was no cheering just a few feet away, as one of her jurors stood before a bank of cameras on the courthouse steps, explaining why Martha deserves to go to jail. “She is just another human being,” said Chappell Hartridge, 47, a computer technician from the Bronx. The stone-faced Stewart never broke stride as she cut a path through the media circus. She climbed into the back of a waiting SUV and made a quick getaway to her daughter’s Tribeca loft, where she could absorb the jarring new turn in a life that once seemed destined only for good things.
To some, Martha Stewart finally got her just deserts. To others, Martha is a victim of what her pal Rosie O’Donnell calls a “bitch hunt.” The outcome only magnifies the sense that, in the court of public opinion, there has always been a hung jury when it came to Martha Stewart. She is a Rorschach test: people have always seen in her what they want to see, whether it’s the domestic goddess who transformed mundane housework into an artistic pursuit or the prickly perfectionist who makes us feel inadequate if we can’t whip up a peach flan while regrouting the kitchen backsplash. A jury of 12 regular folks in Manhattan, though, saw someone who stonewalled and lied to federal investigators and conspired with her stockbroker Peter Bacanovic to cover up her suspicious sale of ImClone stock two years ago. She vows to appeal and maintains her innocence. (At least so far: after the verdict, she declared on her Web site, “I have done nothing wrong,” then deleted the claim a few hours later.) But her image as a happy homemaker has been shattered. Forget the Hamptons. Martha’s next new home might be The Big House.
Money was never the issue, of course. Martha, 62, wasn’t convicted of hurting her own shareholders; in fact, the judge threw that rap out. Instead, she took the fall simply for lying about why she sold some stock. And her ill- gotten gains were a pittance. The former billionaire saved herself $52,000 by dumping nearly 4,000 shares of ImClone on Dec. 27, 2001, after learning that her pal Sam Waksal, the biotech company’s founder, was frantically trying to unload his stock ahead of bad news. But the case opened a window into a privileged world of insiders, who trade stock tips like gossip and see wealth as a way of keeping score. (Martha dismissively told Barbara Walters her ImClone savings represented .006 percent of her net worth.) And in the stock bubble’s wake, it became a symbol of an era when it seemed that everyone was getting rich, but it was really only the well connected. One member of her jury cast her as the poster CEO for all the corporate scandals and hoped her conviction is an overdue victory for the little guy. “Investors may feel a little more comfortable now that they can invest in the market and not worry about these scams and that they’ll lose their 401(k),” said Hartridge.
The real question now is whether Martha’s conviction will be remembered as a main course of corporate comeuppance, or just an appetizer. After all, there haven’t been any guilty verdicts yet for the rogues from Enron, WorldCom and Tyco. Ken Lay still hasn’t been charged with anything. And those are the guys accused of looting the corporate kitty and vaporizing their employees’ retirements. While her crimes may pale in comparison, the lasting impact of the Stewart case may be that it will become the new standard for judging all fat cats who don’t play by the rules. “We’re now going to see the ‘Martha test’ as a fair punishment for white-collar crimes,” says Jeffrey Sonnenfeld, associate dean of the Yale School of Management. “This is going to have a strong influence on jurors from here on out.”
Martha now faces the once unthinkable prospect of prison. Legal experts say she’ll go away for one to three years, probably at a minimum-security “prison farm.” Her attorneys will ask for probation at the sentencing hearing on June 17, but they might as well ask for a million bucks. “The judge is going to be fearful of giving her any leniency because it will look like favoritism to a celebrity,” says lawyer Marcia Shein, who represents felons facing sentencing. Martha’s appeal is a long shot, since her attorneys must prove that the judge made serious errors. And Judge Miriam Cedarbaum actually ruled in favor of the defense most of the time, including dismissing the government’s most serious charge against Stewart. Perhaps the cruelest penalty for Martha is the prospect of being cast out of the $250 million company she built from scratch. As a convicted felon, Martha faces a lifetime ban from serving as an executive or a director of a public company.
But here’s the depressing reality: Martha could have avoided this entire mess if she had simply fessed up to begin with, federal investigators say. Had she admitted wrongdoing in early 2002, she could have gotten off with a $200,000 fine and no jail time. And Newsweek has learned that the Feds gave Martha another opportunity to avoid prison. Federal prosecutors offered Martha a deal last April to cop to one count of making a false statement, say several sources familiar with the offer. She would have received probation and continued working at her company, they say. But Martha refused to plead guilty to a felony, and a defense source says the Feds couldn’t guarantee she’d stay out of jail.
Martha now has time to reflect on what went wrong. For starters, she admits she wishes she had not returned her broker’s call on Dec. 27, 2001, while jetting off to vacation at the exclusive Las Ventanas resort in Mexico. Martha made that admission not on the witness stand, but to Barbara Walters two months before the trial. Martha never took the stand in her own defense, a risky strategy that legal experts say was probably based on the diva’s volatility and the inconsistencies in her story. Another risk: if the judge believed Stewart lied on the stand, she could have doubled her prison sentence. Still, juries like to hear from celebrity defendants. “I would have loved to have heard the other side of the story,” says juror Hartridge.
Martha’s minimalist defense was supposed to signal that the prosecution’s case was too weak to bother trifling with. Her mouthpiece, the veteran white- collar-crime defender Robert Morvillo, put only one witness on the stand and questioned him for 10 minutes. That left Martha’s fate riding on the theatric Morvillo’s closing argument. He argued that his client was too smart to engage in a “conspiracy of dunces.” And he chose to make a startling admission: Martha had been tipped that Sam Waksal was trying to sell that fateful day. “No one is disputing Ms. Stewart was told the Waksals are selling,” thundered Morvillo, although that was, in fact, the first time Martha admitted receiving that tip. But Morvillo’s attempt at candor didn’t sway the jury. And Martha’s frosty demeanor struck Hartridge as arrogant. “She seemed to say: ‘I don’t have anything to worry about. I fooled the jury. I don’t have anything to prove’.” Even courtroom visits by Martha’s pals Rosie and Bill Cosby seemed highhanded. “Like that was supposed to sway our decision,” sniffed Hartridge.
Martha’s codefendant Bacanovic didn’t do her any favors, either. Bacanovic’s lawyers seemed to make Martha look bad at every turn. They introduced e-mails from the prosecution’s star witness, Bacanovic’s assistant Douglas Faneuil, that portrayed Martha as a shrew. One had her threatening to fire Bacanovic if he didn’t upgrade Merrill Lynch’s telephone-hold music. In another, Faneuil described for a friend how Martha imitated the poor diction of a Merrill receptionist with a sound “like a lion roaring underwater.” The courtroom erupted in laughter, except for an ashen Stewart. Yet all seemed forgiven after they’d been convicted, and Martha embraced Bacanovic in a private room, according to a witness.
In the end, the government’s case really came down to three key witnesses — Faneuil, Martha’s assistant Ann Armstrong and her friend Mariana Pasternak (make that former friend). Faneuil was riveting. With the earnestness of a schoolboy and the dramatic flourishes of a one-man show, the 28-year-old channeled the voices of his boss and his No. 1 client. Faneuil was the only one in the office when the Waksals lit up his phone with orders to sell that day. (Bacanovic brokered for both Martha and the Waksals.) Faneuil explained how his boss reacted when he reached him on vacation in Florida. ” ‘Oh my God’,” Faneuil said in Bacanovic’s voice, ” ‘you’ve got to get Martha on the phone!’ ” When Stewart’s private jet touched down in San Antonio, Texas, to refuel, she called in. ” ‘Hi, this is Martha’,” Faneuil testified in Stewart’s clipped tones, ” ‘what’s going on with Sam?’ ” Once Fa-neuil explained that Waksal was trying to cash out, Martha asked ImClone’s price and ordered: ” ‘I want to sell all my shares’.”
As compelling as he was, though, jurors were not entirely convinced, because Faneuil had cut a deal with prosecutors in exchange for his testimony. He pleaded guilty to a misdemeanor for initially backing Bacanovic’s and Stewart’s alibis. “This was the most stressful experience of his life,” says Faneuil’s attorney Marc Powers. But Armstrong’s and Pasternak’s testimonies supported Faneuil’s story. “Hearing those two others testify made me believe [Faneuil] was telling the truth,” says Hartridge.
Armstrong could barely bring herself to testify against her boss of six years. As soon as she took the stand, she burst into tears while recalling a plum pudding Martha had given her for Christmas. But the next day, Armstrong gave a clear-eyed account of her boss’s doctoring a key phone log four days before meeting with the Feds. The Dec. 27, 2001, message originally read: “Peter Bacanovic thinks ImClone is going to start trading downward.” Martha sat at Armstrong’s computer and changed it to “Peter Bacanovic. re: imclone.” Martha immediately ordered Armstrong to change it back. But by then, the jury concluded, a crime had been committed.
Pasternak, an old pal who went on the Las Ventanas holiday, provided the most vivid peek inside Martha’s lavish life. There was the $1,500 per night suite, the $1,500 in massages and the $1,060 “sea grill dinner.” The tab for a week in paradise: $17,000. And Martha turned it in as a business expense to her company. (Despite a net worth that once topped $1 billion, Martha also has submitted expense reports for haircuts and a weekend chauffeur.) When her CFO bounced her Las Ventanas expenses, Martha attempted to get Pasternak to pay part of the bill. Pasternak balked and, in the end, got the last word. On the stand, she recounted Martha’s bragging about the tip she received from Bacanovic about Waksal. “Isn’t it nice to have brokers who tell you those things?” she recalled Martha’s saying as they lounged on their terrace.
Finally, after seven weeks in a stuffy courtroom, it was the jury’s turn. They took three days to convict, although they cooked Martha’s goose after only a day, before moving on to Bacanovic. The eight women and four men on the jury seemed confident, conscientious and convivial. They had one last lunch together Friday before delivering the verdict. When they filled the jury box for the final time, though, the tension was overwhelming. Juror Margaret Crain sobbed as the judge ticked off all the guilty counts (4 for Martha, 4 for Bacanovic.) Martha’s daughter, Alexis, doubled over in tears in the front row of the gallery. Alexis’s husband, John Cuti, also one of Martha’s lawyers, buried his face in his hands at the defense table. Martha stared straight ahead, showing no emotion. To the outside world, the first sign of a verdict was the chaotic scene of TV producers pouring out of the courthouse waving red scarves, indicating “guilty” (green was for “not guilty”). Beepers and BlackBerrys began buzzing everywhere. A convention of white-collar-criminal attorneys in Miami Beach quickly reached a conclusion on the lesson of Martha’s trial. “This is an absolute lesson,” says former federal prosecutor Melinda Haag, “that it is never a good idea to talk to the government.”
The question now is, will anyone ever want to talk to, or buy anything from, Martha Stewart again? Her once solid-gold name is now a lead weight, business experts say. “The parent company has got to distance itself from Martha Stewart the person pretty quickly,” says Jeff Swystun, a brand consultant with Interbrand. “They’ve got to drop her name from everything that hits the customer.” But don’t tell that to Ruth Lloyd of Willowick, Ohio. The retired secretary still has the first issue of Martha Stewart Living magazine prominently displayed in her living room. “This is all about the need to make an example of a powerful woman,” says Lloyd, fighting back tears. “Martha Stewart is not Enron.”
True believers, like Lloyd and the dozens who lined the barricades for Martha at her trial, will remain loyal. And they’ll undoubtedly keep the faith even as she heads off to prison. But will they still be there when she comes out? “Americans love to forgive,” says Yale’s Sonnenfeld. “But this is going to be pretty damn hard for her to get past.” Still, Martha’s greatest skill has always been re-creating herself, from Martha Kostyra of Nutley, N.J., to fashion model, to stockbroker, to homemaker, to corporate chieftain. Hollywood has already given Martha a happy ending. NBC’s biopic “Martha, Inc.” last year was mostly a hatchet job. But the producers had to make up an ending, and chose something hopeful and forgiving: Martha mobbed by adoring fans at a county fair. “We brought her back to the people,” explained the movie’s producer Howard Braunstein, “because people love her despite what’s going on in New York with her stock crisis.” Martha’s best hope is that, with the passage of time, her life will imitate art. But it’s hard to imagine that the phrase “It’s a good thing” will ever again be more than a tired and tragic punch line.
Fed.’ The Inmates are Already Expecting Her.
It’s just 25 miles from Martha Stewart’s country manse in Bedford, N.Y., to the minimum-security women’s federal prison camp at Danbury, Conn. But for a woman used to unparalleled luxury, her likely future home will seem a world apart. Assuming the judge doesn’t buy her pleas for leniency — or order her to a higher-security facility — Stewart is probably facing time in a prison camp. While there are other suitable facilities in West Virginia, most experts point to Danbury — which housed Leona Helmsley and the Rev. Sun Myung Moon — as her likely destination because it’s close to her family.
According to Danbury alumni, the women’s camp has no fences or barred cells; instead of breakouts, guards have worried about nearby residents trespassing to enjoy the lake. “Campers” — most in for immigration or drug charges — sleep in small, bunk-bedded dorm rooms (some house eight women apiece) and spend their days in the kitchen or maintaining the grounds. For recreation, there are two TV lounges, a law library, a track, and a gymnasium used for Pilates, yoga, dancersize or aerobics (but not tai chi, which the Feds have deemed a martial art). There’s no e-mail or cell phones (and long waits for pay phones), and guards discourage friendships by rotating bunkmates frequently. But Caryl Hartjes, a Wisconsin nun who spent three months at Danbury last year after being arrested during a protest, remembers small pleasures, like the birthday party inmates threw for her. She says the inmates have been anticipating Martha’s arrival. “They just assumed she was guilty,” Hartjes says. “Their feeling was she’ll be one of them. Prison is a great equalizer, and her money isn’t going to help her one bit.”
Where money will help her is at the commissary, where she’ll buy cigarettes (handy if she wants to pay cash-strapped inmates to make her bed) and fresh fruit (a prized commodity). But regardless of her bank account, Stewart will be dealing with no-nonsense guards who’ll search her before and after visitations and shackle her if she leaves the facility for a doctor’s visit. “To classify any of the federal prison camps as ‘Club Fed’ or to imply there’s any sense of civility or decency about them is not right,” says Herb Hoelter of the National Center on Institutions and Alternatives, who represented Helmsley, Michael Milken and Ivan Boesky at their sentencings. Looking ahead, the woman who built an empire dealing out tips on better living may want to phone some of those prison-camp grads for tips on surviving the next chapter of her complex life.
Powerhouse. Can It Survive Without Martha?
In the hours after the verdict was announced, the question reverberated from CNBC to the aisles of Kmart: can Martha Stewart Living survive without … Martha Stewart? The company, once a Wall Street darling, has been pummeled the past two years, its prospects clouded by Stewart’s legal problems and the bankruptcy of Kmart, distributor of Martha-approved bedsheets and housewares. The day before the verdict, CEO Sharon Patrick assured investors that “we have made appropriate contingency plans” in case Stewart was found guilty. Few were convinced. After the verdict, the stock dropped by nearly a third.
It could fall even further. Since Stewart took her empire public in 1999, investors have worried whether the firm could survive if its namesake suffered, say, a disabling injury. In many ways her conviction is even more harmful: besides removing her from management, it taints an enterprise built on wholesomeness and good taste. Even before the verdict, ad pages at Martha Stewart Living were down 30 percent; last week the company announced its first annual loss. Now that defection is expected to become a stampede. “The verdict gave advertisers the answer they were looking for,” says Robin Steinberg, top print- media buyer for Carat U.S.A. “There is no gray area here.”
The company conceded that a guilty ruling would likely mean bigger ad problems — it could completely imperil its key TV franchise. Some broadcast advertisers negotiated “morality clauses” as a way out if Stewart goes to jail and can’t appear on the tube. The company hopes loyal customers will keep it alive. People buy Martha’s linens and tablewares because they love the quality and style, management says, and that will continue even without Martha. The company has also shown some success at uncoupling Martha from its wares. A new magazine, Everyday Food, is doing well, with very little Martha in its pages. Another non-Martha mag, Organizing Good Things, is in the works. Still, skepticism abounds. “The company is facing an uphill battle,” says analyst Laura Richardson of Adams, Harkness & Hill. Although the firm has a big cash reserve — $169 million — and little debt, “this really is a worst-case scenario,” she says.
Mafia bosses are sometimes able to run their empires from behind bars. Some observers say Martha’s best hope lies in the opposite strategy: cutting loose her progeny, recognizing that their odds of survival increase as she recedes from sight. “She has to step back, stop fighting and pass on a little of her magic to the people around her,” says James O’Rourke, a business professor at Notre Dame. The question now is whether that magic has turned into a curse.
The March 15 issue of Newsweek: Martha Stewart Guilty (on newsstands Monday, March 8).
