Martha Stewart to Step Down From MSLO After Fraud, Obstruction Indictment

NEW YORK – Martha Stewart (search) announced Wednesday she would step down from her role as chairman and chief executive of Martha Stewart Living Omnimedia Inc. (MSO), hours after she was indicted on securities fraud, obstruction of justice and conspiracy charges by a federal grand jury for her role in the ImClone (search) insider-trading scandal.

Stewart did not address the indictment in the brief statement announcing her resignation.

"I love this company, its people, and everything it stands for, and I am stepping aside as chairman and CEO because it is the right thing to do," she said.

The company's president and chief operating officer, Sharon Patrick, will replace Stewart as CEO. Besides her spot on the board, Stewart plans to stay on as chief creative officer, the company statement said.

Stewart also faces charges of conspiracy and making false statements, while Peter Bacanovic, a former Merrill Lynch & Co. (MER) stock broker, was charged with perjury and obstruction of justice.

Stewart and Bacanovic pleaded innocent before a federal judge to all charges. Stewart has denied wrongdoing in the ImClone stock sale and has claimed to have had an arrangement with Bacanovic for the automatic sale of the stock when it dropped to a certain price.

"This criminal case is about lying -- lying to the FBI, lying to the SEC and investors," U.S. Attorney James Comey said. "That is conduct that will not be tolerated. Martha Stewart is being prosecuted not because of who she is, but what she did."

Stewart arrived at the federal courthouse in Manhattan just before noon, breezing past a crowd of reporters and camera crews without a word.

The scandal surrounds Stewart's sale of 4,000 shares of biotech drug maker ImClone Systems Inc. on Dec. 27, 2001 -- the day before the government issued a disappointing report on an ImClone drug, sending the company's stock price tumbling.

The homemaking guru, who was a billionaire during the 1990s, saved $45,000 from the sale, according to the government.

In a statement, Stewart attorney Robert Morvillo said the home-decorating maven had done nothing wrong and asked why the government would file the charges after a year and a half of investigation.

"Is it for publicity purposes because Martha Stewart is a celebrity?" he said. "Is it because she is a woman who has successfully competed in a man's business world by virtue of her talent, hard work and demanding standards?"

If convicted of all counts, Stewart faces up to 30 years in prison and $2 million in fines, although the sentence would likely be much less under federal guidelines.

Meanwhile, the U.S. Securities and Exchange Commission (search) filed a civil suit in Manhattan seeking to bar Stewart from being in charge of any public company.

The SEC alleged that Stewart "committed illegal insider trading when she sold stock in ... ImClone Systems Inc. on Dec. 27, 2001, after receiving an unlawful tip from Bacanovic."

The commission further alleged that Stewart and Bacanovic "subsequently created an alibi for Stewart's ImClone sales and concealed important facts during SEC and criminal investigations into her trades."

The charges have spelled not just serious legal headaches for Stewart, but a crisis for her company, which has struggled with a public relations nightmare that has grown since she became involved in the stock scandal a year ago.

The indictment came a day after Martha Stewart Living Omnimedia issued a statement saying Stewart's personal lawyers believed federal prosecutors would pursue criminal charges soon.

Stewart's name and image is tied to an empire of products from Martha Stewart Everyday (search) merchandise, exclusive to Kmart, to magazines, books and TV shows. The company has struggled to move forward with Everyday Food, a new magazine tested in January that was the company's first without Stewart's name, as well as a Martha Stewart Signature furniture collection.

A fascinated public has watched Stewart try to keep her highly profitable public persona intact, doling out advice on decorating or preparing a tasty dinner on a television program, while news headlines have focused on the criminal cases of close friends or her legal troubles.

The scandals had affected earnings at her company, Martha Stewart Living Omnimedia, which have been slumping. Revenue in the first quarter of the year dropped 15 percent from the same period a year earlier. Martha Stewart Living Omnimedia reported sales of $295 million and a staff of 580 last year.

However, shares of Martha Stewart Living Omnimedia Inc. (MSO) rose more than 6 percent, climbing 61 cents to $10.13 on the New York Stock Exchange (search).

The stock's rise marks a dramatic turnaround from Tuesday when news of Stewart's pending indictment sent it plunging 15 percent to $9.52. The company, which went public in October 1999 with shares trading at $18, saw its stock hit an all-time low of $5.26 last year.

"It seems that some people think Martha Stewart shares are undervalued and that's the reason they are being bought up now," said Charles Berents, chief investment officer at Boston's North American Management Corp.

Stewart, who was a stockbroker before establishing her own catering business, and ImClone's co-founder, Sam Waksal (search ), were close friends, often seen and photographed together at events in New York.

Stewart has maintained that she had a standing order with her broker, Bacanovic, to sell the shares if the stock fell below $60.

Waksal has admitted he tipped off his daughter Aliza to sell ImClone stock before it plummeted on the bad news. But he has not implicated Stewart, and his plea was not part of an agreement to cooperate with prosecutors.

Waksal is to be sentenced next week in Manhattan federal court after pleading guilty to six counts in the insider-trading scandal. He could get to six to seven years in prison, plus fines. His defense team is seeking a lighter sentence, and prosecutors are seeking a heavier one -- claiming Waksal cheated ImClone shareholders as far back as 1986.

In recent days, ImClone shares have risen sharply after the company disclosed positive results from new clinical trials of Erbitux, reaching their highest level since January 2002.

Fox News Channel's Anna Stolley, Reuters and The Associated Press contributed to this report.