MARTHA'S MAKEOVER

As Martha Stewart prepares to go on trial this month, she's carefully crafting a new, homespun image. Forget the high priestess of domesticity; she's now Martha From the Block. She took Barbara Walters on a stroll down the humble street in Nutley, N.J., where she grew up as one of six children. "I had to get up really early to use the bathroom," Stewart said in front of the tiny bungalow the Kostyra family called home. She also brought her 89-year-old mother on "Larry King Live" to serve Polish babka, and wished her host happy new year--in Polish. King was swept up in Martha's makeover. "The Stewarts," he barked to close the show, then corrected himself. "No, the Kostyras."

As hard as she tries to recast herself as Martha Kostyra of the people, Stewart remains the poster CEO for corporate scandals. When she makes her entrance at the federal courthouse in Manhattan Jan. 20, it will be scrutinized on a continuous cable loop. Sources close to the case tell NEWSWEEK there's a good chance she'll take the stand and accuse prosecutors of misinterpreting what she told them. Her trial already overshadows the courtroom drama unfolding across town for ex-Tyco CEO Dennis Kozlowski (he of the $6,000 shower curtain). And other trials coming up for the guys from WorldCom, Adelphia and HealthSouth will pale beside Martha's main event. Even news of the on-again, off-again talks with former Enron CFO Andrew Fastow to cut a deal and finger others is bound to fade once Stewart enters the dock. "For a prosecutor," says Emory law professor William J. Carney, "this is a highly visible scalp."

And yet for all the spotlight it will command, Stewart's trial really has nothing to do with corporate governance. After all, she's not accused of pillaging her company, like Kozlowski or the Enron gang. She's not even facing the insider-trading charges that sent her pal Sam Waksal up the river. Instead, Stewart, 62, is facing up to 30 years in prison because she is accused of lying. The Feds say she fibbed about having no inside info when she dumped $228,000 in ImClone stock on Dec. 27, 2001, one day before regulators rejected the biotech company's cancer drug and the stock tumbled. And they claim she used that lie to try to prop up stock in her own company, Martha Stewart Living Omnimedia (it didn't work: MSO stock is now worth half what it was before the scandal, and HGTV just dropped two of her shows). But Stewart's alleged transgressions are more Watergate than Wall Street. And they won't set any precedents in corporate boardrooms, business experts say. "Out of all the outrageous abusers out there," says Jeffrey Sonnenfeld, associate dean of the Yale School of Management, "that she should be offered as the sacrificial lamb is absurd."

The most serious charge, securities fraud, will be the hardest to prove. The notion that Stewart deceived her own stockholders by declaring herself innocent of insider trading in another company (got that?) puts the prosecution in uncharted waters. "It's difficult to imagine how the government will prove what she was thinking," says Melinda Haag, a former U.S. attorney in charge of prosecuting white-collar crimes in northern California. Even the judge on the case, Miriam Cedarbaum, called the charge a "novel application of securities laws."

The Feds' strongest argument appears to be simply about Martha's truthfulness. Stewart and her broker, Peter Bacanovic, who are on trial together, contend they had a standing order to sell her ImClone stock if it fell below $60. But prosecutors have documents that poke holes in that story. Bacanovic allegedly recorded Martha's "stop-loss order" by scribbling "@60" on her Merrill Lynch work sheet, but it's in a different ink than other writing on the page. And Bacanovic's assistant, Douglas Faneuil, is expected to testify that he informed Stewart that Waksal, then ImClone's CEO, was trying to dump stock that fateful day. But perhaps most damning, the Feds say that four days before Stewart met with them, she altered her secretary's computer phone log. They say she changed the entry for Dec. 27, 2001, to read "Peter Bacanovic Re: ImClone," rather than the actual message, "Peter Bacanovic thinks ImClone is going to start trading downward." Even though she later changed it back, that bit of editing looks bad given that Martha was once a stockbroker. "Most white-collar criminals go to jail for things they did after they were accused," says Columbia law professor John Coffee.

In the end, if Stewart is to save herself and her empire, she has to give the performance of a lifetime on the stand. And she's facing a tough crowd. Polls show that respect for execs remains at a historic low, and Manhattan juries are not typically kind to powerful women (just ask Leona Helmsley). That's why Martha is working so hard on her softer side. "I'm scared," she told Barbara Walters. "The last place I would ever want to go is to prison." On "Larry King" she confessed a desire to become a grandmother, and declared that her 50 canaries "are my grandchildren, until I actually get some." But the ex-billionaire dropped the Grandma Martha routine when Walters asked how much she had saved by dumping ImClone ahead of the bad news. "It amounted to approximately $40,000," Martha said, "about .006 percent of my net worth." Stewart may be getting a bum rap by being lumped with the bad-boy CEOs. But if she makes 40 grand sound like chump change on the stand, she might end up sharing a big house with them.

MARTHA'S MAKEOVER | News
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