Martha Judge Throws Out Securities Fraud Charge

In a huge victory for Martha Stewart (search), a federal judge on Friday threw out the most serious charge against her in her insider trading case — securities fraud — saying prosecutors had failed to present sufficient evidence to allow the jury to decide the matter.

The charge accused Stewart of deceiving investors in her company, Martha Stewart Living Omnimedia (MSO), by lying about her sale of ImClone Systems (IMCL) stock.

• Raw Data: Opinion, U.S. v. Stewart and Bacanovic (pdf)
• Raw Data: Superseding Indictment, U.S. v. Stewart and Bacanovic

"I have concluded that no reasonable juror can find beyond a reasonable doubt that the defendant lied for the purpose of influencing the market for the securities of her company," Cedarbaum wrote.

Stewart still faces four criminal counts — conspiracy, obstruction of justice and two counts of lying to investigators. The judge declined to throw out any of the five counts against broker Peter Bacanovic (search ).

The securities fraud count carried a potential prison sentence of 10 years and a $1 million fine. The remaining four counts against Stewart each carry a prison sentence of five years and a $250,000 fine.

Stewart promptly posted an Internet letter to reassure her fans.

"As my trial nears its conclusion, I am hopeful and optimistic that I will be exonerated," Stewart said in a letter posted on her Web site.

"I'm pleased that the judge has dismissed the most serious of the charges against me, concluding that there is no evidence to support it."

A smiling Stewart went arm-in-arm with her lawyers to a nearby Chinatown restaurant for a celebratory lunch after the judge issued the ruling, stopping to greet fans along the way. Most days since proceeding began Jan. 20, Stewart has stayed at the courthouse to eat lunch.

The securities fraud charge had been criticized by Stewart's lawyers as an unprecedented violation of the First Amendment, and the judge herself had referred to it as "novel" and "problematic."

It accused Stewart of trying to prop up the stock price of Martha Stewart Living Omnimedia when she claimed in 2002 that she had sold ImClone because of a deal with Bacanovic to dump the stock when it fell to $60.

Stewart personally stood to lose $30 million for every dollar her stock price dropped.

The government says her claim was a lie, and that Stewart sold instead because Bacanovic sent word to her that her friend, ImClone founder Sam Waksal (search ), was frantically trying to sell his ImClone shares.

The FDA's rejection of ImClone's cancer drug Erbitux (search) sent the company's stock tumbling soon after Stewart sold her 3,928 shares. The drug has since been re-approved.

Cedarbaum issued her decision just as lawyers in the case began meeting with her behind closed doors to discuss the instructions the judge will give jurors when they begin deliberating next week.

The decision put a charge into Martha Stewart Living Omnimedia stock, sending its shares up more than 11 percent on the New York Stock Exchange.

A spokeswoman for Stewart did not immediately return a call, and Stewart herself was in the meeting with lawyers and the judge. A spokesman for federal prosecutors did not immediately return a call for comment.

The securities-fraud charge focused on three statements in 2002 — one on June 6 by her lawyer, and two on June 12 and June 18 by Stewart herself.

Each time, the $60 agreement was given as the reason for Stewart's stock sale. Stewart's lawyers said she was just trying to clear her name, but the government contended that she was spreading a lie with deliberate purpose.

The judge conceded that Stewart had a motive — her heavy investment in her own company — to deceive investors. But she said the government had not sufficiently shown an intent by Stewart to defraud investors.

"Here, the evidence and inferences the government presents are simply too weak to support a finding beyond a reasonable doubt of criminal intent," the judge wrote in a 23-page ruling.

Closing arguments in the trial are scheduled to begin Monday and last well into Tuesday. The jury is expected to receive its instructions and begin deliberating on Wednesday.

Stewart's lawyers still must convince the jury that she was not lying to investigators when she told them in 2002 that she had no memory of being tipped about Waksal.

The government's star witness in the trial was Douglas Faneuil (search), the former Merrill Lynch & Co. (MER ) assistant who claims he gave Stewart the tip about Waksal on orders from Bacanovic, his boss.

Stewart's personal assistant also testified that Stewart ordered her to change a computerized record of a phone message Bacanovic left for her on the day she sold ImClone stock — then ordered the assistant to change it back.

Reuters and The Associated Press contributed to this report.