Inserting an unusual twist into their indictment of the domestic diva, prosecutors charge that she committed a crime when she stood up in public last summer and denied engaging in insider trading.
"I was a little surprised at that," said Richard A. Serafini, a former economic crimes prosecutor in New York. "There's kind of a natural tendency when you're confronted with something to deny it. Now they're charging it as market manipulation."
Legal experts said the charge is a high-risk move designed to convince a jury that Stewart hurt thousands of ordinary stockholders in Martha Stewart Living Omnimedia by trying to cover up her legal problems.
Stewart was indicted Wednesday on five federal counts — including obstruction of justice, conspiracy and lying to investigators — tied to her December 2001 sale of nearly 4,000 shares of ImClone Systems stock.
She pleaded innocent to all charges, but could go to prison for several years if convicted. Her former stockbroker, Peter Bacanovic, was also indicted and pleaded innocent.
Stewart dumped her ImClone stock one day before the government issued discouraging news about an ImClone cancer drug.
The government says Stewart had inside knowledge the stock was about to plummet; she contends that she had a standing agreement with Bacanovic to sell the ImClone stock if the price dipped below a specified level.
But it was the charge of securities fraud — placed near the end of the 41-page indictment — that surprised many legal watchers.
The charge cited a speech Stewart gave at an investors conference in New York on June 19, 2002, a week after ImClone founder Samuel Waksal, her longtime friend, was arrested on fraud charges.
In the speech, Stewart maintained her sale of ImClone had been perfectly legal, and that she was cooperating "fully and to the best of my ability with investigators."
Prosecutors say those were lies designed to pump up the stock price of her company. Martha Stewart Living Omnimedia rose more than $2, or about 14 percent, to $16.45 after her speech. The stock now trades at about $10.
The indictment points out that Stewart owned more than 60 million shares of Martha Stewart Living stock — 60 percent of the company's class A stock and all of the firm's class B stock. Her holding comprised 94 percent of all stock outstanding.
"Stewart made these false statements with the intent to defraud and deceive purchasers and sellers of (her company's) common stock and the preserve the value of her own…stock by preventing a decline in the market price," the indictment reads.
"What the government is trying to suggest here is that this was not a victimless crime," Robert Mintz, a former federal prosecutor, said Thursday. "That is clearly the most controversial part of this indictment."
Stewart, 61, resigned as head of the company after the indictment, but said she would stay on the board and remain the company's creative chief.
On Thursday, the home-style guru made an appeal to public opinion, taking out a full-page ad in USA Today and launching a Web site to pronounce herself innocent.
"The government's attempt to criminalize these actions makes no sense to me," Stewart writes in an open letter on the site, which invites her fans to e-mail her with their thoughts.
While legal experts say the securities-fraud charge could be a reach for prosecutors, they say the rest of the indictment amounts to a daunting case against Stewart.
Critical to the government's case is a claim that Stewart went out of her way to cover up a message from Bacanovic on the day of the ImClone stock sale in which he said he believed the stock would fall.
More than a month later, the government says, Stewart accessed her assistant's computer phone log and changed an entry about the message to simply: "Peter Bacanovic re ImClone."
"It's extremely damning evidence," said David Marder, a former Securities and Exchange Commission lawyer. "It goes way back to Richard Nixon — you see people get in more trouble for covering things up than of the actual conduct."
Still, prosecutors did not actually indict Stewart on the charge of insider trading, an extremely difficult charge to prove in a criminal case.
They did not allege she had advance word of the bad news on ImClone — only that she knew the Waksal family was dumping its stock.
Instead, the SEC charged Stewart with insider trading in a civil action filed Wednesday just after the criminal charges.
The complaint seeks to ban Stewart from ever leading a public company and force her and Bacanovic to pay more than $45,000 — the losses they say Stewart avoided by unloading ImClone stock.
Proving insider trading in a civil case requires showing only that a "preponderance of the evidence" implicates the defendant. Convicting someone of insider trading in a criminal case requires proof "beyond a reasonable doubt."
"Clearly, a tactical decision was made to shy away from the more complex securities violations," Mintz said. "The government strategy here is going to be to make this case as simple as possible."
One way to keep it simple, says CBS News legal analyst Andrew Cohen, is to focus on lying — Stewart's alleged untruthfulness to federal investigators as well as the investors who heard her speech.
The impeachment saga of President Clinton, Cohen said, created an awareness of how lying about something to an investigator or prosecutor can be considered criminal, even if the underlying offense is not.