NEW YORK – Facing a stock scandal that threatened to shatter Martha Stewart's carefully tended reputation and enormous fortune, her defense team made three high-stakes gambles: They let the case go to trial, kept Stewart off the witness stand and put on a defense that took less time than one of her syndicated cooking shows.
The perfectionist homemaker wound up with the most crushing loss possible — a guilty verdict on all counts, and a likely new home behind bars.
"She should get her money back from her lawyers," said Thomas Ajamie, a veteran Houston securities attorney. "How this even went to trial in the first place, I have no idea."
Stewart should have admitted from the beginning that she sold her ImClone Systems (IMCL) stock in 2001 based on a tip that ImClone CEO Sam Waksal (search) was selling his shares, Ajamie said.
But Stewart made no mention of the tip in a Feb. 4, 2002, interview with investigators, and she said in a follow-up interview two months later that she had no memory of knowing in advance that Waksal was selling.
Legal experts said Stewart might have avoided prison if she had come clean then because the money at stake in the trade was so small. Stewart, who was briefly a billionaire after Martha Stewart Living Omnimedia (MSO) went public in 1999, saved $51,000 by selling a day ahead of a damaging government report about an ImClone drug.
"Had she admitted the mistake early on, she would have spent no time in prison," said Ajamie, who was careful to point out he was speaking in hindsight. "She's much worse off than had she tried to go in and just admit the mistake."
Her lawyers insisted Stewart was telling the truth when she said she did not recall receiving the tip that Waksal was selling ImClone shares — a tip they have conceded she did receive.
By the spring of 2003, with a grand jury nearing an indictment of Stewart and broker Peter Bacanovic (search), federal prosecutors were insisting on prison time in any plea deal with Stewart, people close to the case have said.
At trial, Stewart lawyer Robert Morvillo (search) called just one witness, a lawyer who attended the Feb. 4 interview, in hopes of casting doubt on the government's version of exactly what questions Stewart was asked. The defense questioned him for just 20 minutes.
But Morvillo, who is considered among the best white-collar criminal defense attorneys in the country, kept Stewart off the stand. He was betting that jurors would decide the defense had undermined the prosecution's case, which included nearly two dozen witnesses.
Instead, jurors convicted Stewart on all four counts — conspiracy, obstruction of justice and two counts of lying to investigators. Bacanovic was convicted of four counts, and cleared of a charge of falsifying a document.
One juror, Chappell Hartridge, said he would have liked to hear testimony from Stewart or Bacanovic. Without them, no witness was able to definitively support their contention that they had a prior arrangement to sell ImClone when it hit $60.
"I would have liked to have heard from her," Hartridge said. "I would have loved to have heard the other side of the story."
Still, some outside lawyers said Morvillo made the best decision he could — and pointed out that any case that goes before a jury is unpredictable.
Putting Stewart or Bacanovic on the stand would have forced them to reconcile small inconsistencies in the stories they told investigators about the ImClone sale.
And Stewart would have had to answer for an event that jurors said held considerable sway with them — her alteration, four days before she was grilled by investigators, of a phone message from Bacanovic from the day she sold ImClone.
"Two things I would say are true for Morvillo: One, he knows his witness, and two, he knows his facts far better than we do," said Greg Markel, chair of litigation at New York law firm Cadwalader, Wickersham & Taft.
Morvillo and his partners at the trial, John J. Tigue and John Cuti, scored a huge victory for Stewart on Feb. 27 — persuading U.S. District Judge Miriam Goldman Cedarbaum to drop a charge of securities fraud against Stewart.
Had she been convicted of securities fraud on top of the other charges, she could have faced six or more years in prison. Without securities fraud, legal experts expect Stewart to go to prison for a year or so.
But Morvillo was cut off by the judge on a central part of his defense: that Stewart was never accused of insider trading. The judge ruled he could not argue to the jury about why the government never brought the charge.
Juror Hartridge suggested another damning element of the trial may have been out of Morvillo's control altogether.
Lawyers for Bacanovic put into evidence e-mails depicting Stewart as a fierce-tempered, demanding customer of brokerage Merrill Lynch & Co. (MER) who cursed and yelled at employees there.
The e-mails were an attempt to discredit Douglas Faneuil (search), a former Merrill assistant and the government's star witness, as someone who was fixated on Stewart. He sent the notes to friends after rocky telephone encounters with Stewart.
But the move by Bacanovic's lawyers appeared to backfire by making Stewart seem unsympathetic.
"They may have done more damage to Martha than they realized," the juror said.
Stewart did not speak to reporters after the verdict, but Morvillo began a brief statement by thanking jurors, the judge and even marshals who have guarded the courtroom during the trial.
He did not address questions about the strategy, but vowed an appeal of the verdict.
"We look at this as an opportunity to go to the next round," he said, "and explain to the Court of Appeals what we think went wrong in this case."
Get all the stories you need-to-know from the most powerful name in news delivered first thing every morning to your inbox