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Paula Zahn Now

Martha Stewart Found Guilty

Aired March 05, 2004 - 20:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


(BEGIN VIDEO CLIP)
DAVID KELLEY, U.S. ATTORNEY: If you are John Q. Citizen or Martha Stewart or Peter Bacanovic, we're going to go after you if you make these types of lies.

ROBERT MORVILLO, ATTORNEY FOR MARTHA STEWART: We are confident that once we get our day in the court of appeals, the conviction will be reversed.

(END VIDEO CLIP)

PAULA ZAHN, CNN ANCHOR: Tonight, the verdict in the Martha Stewart case, guilty on all four counts of conspiracy, obstructing justice and making false statements. We're going to spend the next hour on the Stewart case, what she could face at sentencing, what it means for her career and her company, and what life behind bars would be like for the icon who made her living dictating style.

And good evening. Thanks so much for joining us tonight. Welcome. I'm Paula Zahn.

First, for what you need to know about the Stewart verdict, we go live to Deborah Feyerick, who joins us tonight from outside federal court in Manhattan.

Good evening, Deborah.

DEBORAH FEYERICK, CNN CORRESPONDENT: Well, good evening, Paula.

Martha Stewart never broke character. She remained poised, looking straight ahead the entire time the verdict was read. The judge read each count in quick succession. Martha Stewart not smiling, not crying, doing nothing but looking straight ahead as everything was done.

(BEGIN VIDEOTAPE)

FEYERICK (voice-over): Her daughter bowed her head and wept, but Martha Stewart showed no emotion as the verdict was read, a jury finding Stewart guilty on all counts of lying to investigators about her sale of ImClone stock and conspiring with her broker to cover it up.

Her broker, Peter Bacanovic, was found guilty on four of five counts. Lawyers for both vowed to appeal. MORVILLO: We are disappointed at the outcome. We look at this as having lost the first round. We look at this as an opportunity for us to go to the next rounds and to explain to the court of appeals what we think went wrong in this case.

FEYERICK: Prosecutors called the verdict a warning to others in corporate America.

KELLEY: We will not and frankly cannot tolerate dishonesty and corruption in any sort of official proceeding.

FEYERICK: Immediately after the verdict, 11 of the 12 jury members left through a side door. One stayed to talk. Among the strongest evidence, he said, Stewart's traveling companion, who testified that Stewart told her about the ImClone stock sale, saying, "Isn't it nice to have brokers to tell you those things?" the jury not buying the defense argument that there was no cover-up.

CHAPPELL HARTRIDGE, MARTHA STEWART JUROR: I guess the cover-up began when Merrill Lynch started to do their internal investigation and Peter realized that, oh, boy, I better start covering things up.

FEYERICK: Hartridge said it didn't bother the jury that Stewart did not testify in her own defense, though he said it did bother him that Stewart's team put on only one witness, giving the impression there was nothing to worry about.

(END VIDEOTAPE)

FEYERICK: Stewart will be sentenced on June 17. She faces a maximum of 20 years in prison for all of the counts. It's likely she will serve a lot less -- Paula.

ZAHN: What else, Deborah, did you learn from jurors today?

FEYERICK: It was very interesting. Only one of the jurors spoke. And another thing that he said, he really felt that Annie Armstrong, Martha Stewart's secretary, gave very strong testimony, specifically, the message that Martha Stewart tried to change.

Her defense lawyers had said she was simply changing it to reflect what she remembered being told when she was given the message. But it was too much. The jury really believed that that was simply part of the larger conspiracy. And, again, out of all eight counts -- out of four counts for Martha, she was found guilty on all of them. Out of five counts for Peter Bacanovic, he was found guilty on four of them.

ZAHN: Certainly a dramatic turn of fate for Martha Stewart. Thanks so much, Deborah Feyerick.

"In Focus" now, let's dig a little deeper into the legal drama of the Martha Stewart trial.

Senior legal analyst Jeffrey Toobin is here with us tonight.

Good evening.

JEFFREY TOOBIN, CNN SR. LEGAL ANALYST: Hi.

ZAHN: You come at this from a very interesting perspective. You're a former prosecutor. You spent time with Martha before she was indicted. You talked to her extensively about the potential of the case. You didn't believe she had done anything wrong.

TOOBIN: You know, I interviewed her on a memorable January afternoon a year ago for "The New Yorker." And we talked about the case and I was a believer. I thought she was getting a raw deal.

And I sat in that courtroom day after day and I realized that Martha Stewart lied in my face, the way she lied in the face of these FBI agents and SEC lawyers. Her story was simply implausible. And the jury rejected it because it wasn't true.

ZAHN: So you're pretty much telling us tonight you are certain that she spends time in jail?

TOOBIN: Absolutely. Under the federal sentencing guidelines, there is a little play in the joints. Certainly, there will be a fierce legal argument in front Judge Cedarbaum.

But the way I figure the federal sentencing guidelines, she's looking like something like 12 to 18 months, 18 months to 24 months, and no parole in the federal system. She'll serve 85 percent of whatever sentence she gets.

ZAHN: You just made it very clear you felt duped by her.

Let's put on the screen right now something that appeared on her Web site, when she reacted to her verdict. She says: "I'm obviously distressed by the jury's verdict, but I continue to take comfort in knowing that I have done nothing wrong and that I have the enduring support of my family and friends. I will appeal the verdict and continue to fight to clear my name. I believe in the fairness of the judicial system and remain confident that I will ultimately prevail."

Well, guess what? Seven of those words disappeared from the Web site. Guess which ones? "I have done nothing wrong."

TOOBIN: She's still playing games. It's just ridiculous.

And the reason those seven words came out is that, under the federal sentencing guidelines, you can get a lesser sentence if you accept responsibility. She's starting to move into a position of accepting responsibility.

ZAHN: Well, isn't that a little late?

TOOBIN: It's a little late, and you know, to make a silly mistake like that just shows that she's not accepting responsibility, that she still thinks she's done nothing wrong.

ZAHN: It was really fascinating to hear today what one of the few jurors who talked publicly had to say about how they arrived at the decision they did. Let's listen to this together.

(BEGIN VIDEO CLIP)

HARTRIDGE: What message does this send to investors? Maybe to the middle investor, they may feel a little bit more comfortable that they can invest in the market and not worry about these type of scams where they can lose their 401(k)s or just lose money on any plain stocks.

(END VIDEO CLIP)

ZAHN: With as this all from the jury's perspective about a message of sending a very powerful message to the rich and powerful? Did she stand a chance with this jury?

TOOBIN: I think she did. Given the notes that this jury sent, this is a jury that went through the evidence meticulously.

I'm uncomfortable with juries that are trying to send messages, who are trying to do something larger than what the evidence in front of them requires. I'm uncomfortable with jurors talking that way in sort of class-warfare language. Given what I saw of how the jury acted, I think that comment was inconsistent with the rest of the jury's action.

ZAHN: Describe to us the reaction in the courtroom when the verdict came down.

TOOBIN: Very interesting. The jury, when they walked in -- oftentimes, when juries convict, they look exhausted. They look emotionally drained. This jury actually looked almost chipper. They did not seem to worry about this verdict. They did not seem to have it weigh heavily upon them. They walked in rather matter-of-factly.

Some of them had sort of half-smiles on their faces. They didn't look at the defendant, which is always a tipoff that they're going to convict. And as for Martha Stewart herself, the same impassive demeanor. She didn't want to see anyone -- let anyone see what she was feeling inside. Only her daughter, Alexis, you know, broke down in the courtroom.

ZAHN: There are defenders out there tonight of Martha Stewart who say, the reason why she ended up getting convicted was because she was a woman, the jurors aren't used to dealing with women who run billion-dollar empires, and if this had been a man found guilty of the same thing, he not have faced the same wrath.

TOOBIN: I felt a lot that way.

ZAHN: You did?

TOOBIN: Until I listened to the evidence in the case. The evidence in the case is what determined it, not because she's a woman, not because she's a Democrat. Yes, she is all those things, but she lied to these agents and she got caught. That was her problem.

ZAHN: Jeffrey, please stand by.

Joining us from federal court in Lower Manhattan, "People" magazine's Sharon Cotliar.

Always good to see you, Sharon.

SHARON COTLIAR, "PEOPLE": Hi.

ZAHN: I wanted to ask you about something Douglas Faneuil's attorney had to say right after the verdicts. Let's all listen to this.

Actually, I'm going to read it to you. It says: "He came forward because his conscience told him it was the right thing to do. He was solely a witness telling the truth."

Was he the linchpin of the prosecution's case?

COTLIAR: He was certainly a key factor in the case. But the juror that we did speak to did say that Annie Armstrong, Martha's assistant, and Mariana Pasternak, Martha's best friend, played very critical roles in this. So, in fact, it was the people closest to her who really had an impact on the jury and ultimately led to her being convicted, it seems.

ZAHN: Now, have you gotten any reaction from his camp about how he's dealing with the news of this verdict?

COTLIAR: In terms of Douglas Faneuil?

ZAHN: Yes.

COTLIAR: It's got to be mixed emotions for him tonight. I mean, on one level, he's got to be relieved, because his role is over in this. He's testified. He probably won't have to be involved anymore. And, on the other hand, this is a position he never wanted to be in.

ZAHN: I've been fascinated by the e-mail I've gotten here tonight, pretty evenly split between those folks who thought the government was on a witch-hunt, with those who actually think this is absolutely the right punishment.

Rosie O'Donnell made this statement shortly after the verdict -- quote -- "This is unbelievable. I am outraged and beside myself. This is a travesty. Shame on the federal government."

How much, though, of all the wrath she faced had something to do, Jeff, with the fact that she's a public figure?

TOOBIN: I think prosecutors do have a right and, in some respects, it's OK to go after public figures to make an example of them, if they are, in fact, guilty. And I think that's what went on here. They did go after Martha Stewart to make an example of her of someone who lied to FBI agents and got caught. There's nothing wrong with having a deterrent effect in prosecutions, as long as the target is guilty. ZAHN: You were talking about the somewhat impassive reaction of the jury as they came into the courtroom after the deliberations were over.

Describe to us, Sharon, about Alexis, Martha Stewart's daughter, one of the few people to really react quite emotionally in the courtroom.

COTLIAR: Yes, her reaction was incredibly dramatic.

While her mother really remained composed, Alexis, actually, once the jury was out, had her head in her hands. She was slumped over on the bench. I mean, this certainly hit her hard. I think it's pretty safe to say she was, you know, she really felt rocked by this verdict.

ZAHN: Sharon Cotliar, thanks so much for being with us tonight.

Jeffrey Toobin, you're going to be a busy guy. You're going to hang out with us all night long. Thank you.

COTLIAR: Thank you.

ZAHN: It was a friendship with a biotech CEO that led to Martha Stewart's troubles. We're going to trace the financial links that led to her downfall.

The verdict came in and the stock tanked. We're going to look at what's in store now for the business empire Martha Stewart built on selling good taste.

And, if Martha Stewart is sentenced to prison, what kind of a person and what kind of a lifestyle? We're going to look at the possibilities she might face in prison.

(COMMERCIAL BREAK)

ZAHN: Welcome back.

So how did we get here? What sparked the case that led to Martha Stewart's conviction?

Joining us now to talk about how it all unfolded, someone who has closely followed the case from the beginning, Charles Gasparino, a senior special writer at "The Wall Street Journal."

Good to see you.

CHARLES GASPARINO, "THE WALL STREET JOURNAL": Thanks for having me.

ZAHN: How did this all start?

GASPARINO: It started with a some guy, a clerk at Merrill Lynch named Shrimphauser (ph), who was basically looking at suspicious trades in ImClone stock back in 2000, back in 2000, and basically followed that up and saw that Martha Stewart was one of the people who traded around the time that Sam Waksal tried to trade before the ImClone announcement.

ZAHN: But she wasn't in a lot of trouble at that point. The trouble came after she spoke with the SEC.

GASPARINO: Yes, and right. But she spoke right after that, by the way.

The SEC was on it pretty fast. You have to remember, Merrill Lynch monitored the trades. Mr. Shrimphauser sent his information to the compliance department. They sent it to the SEC. And her name came up. And, basically, they started interviewing her right away, although, at first, their target was Waksal. It wasn't her. It was the lies and the sort of misstatements that led them on the trail.

ZAHN: So, if you were trying to reduce this to one little sliver of untruth, where did she really blow it?

GASPARINO: She blew it the first day. She should have just told them the truth. Her story was so obviously absurd from day one that you couldn't help but follow up. And the more people followed up, the more they asked questions, the deeper it got for her.

ZAHN: Why did she talk in the first place?

GASPARINO: Well, that's a good question. If you're CEO of a public company, you almost have to talk. If you don't, it's like the sin of omission. But she

(CROSSTALK)

ZAHN: But she could have gotten away without talking.

GASPARINO: She should have told the truth.

Listen, you could have a $60 stop-loss arrangement and then Doug Faneuil calls you up and gives you a tip that Waskals are saying -- suppose she just said, hey, listen, I made a snap decision. We had some arrangement one day. This guy calls me up the next day. I'm flying to Mexico and I just traded. And you know what? I think that would have worked. She wouldn't have been in this position right now.

ZAHN: Fast-forward to closing arguments, where her defense attorney basically referred to this all as the conspiracy of dunces, saying, these are smart people. They would have covered their tracks better if they'd really done what you're accusing them of doing.

(CROSSTALK)

GASPARINO: Right.

These are average New Yorkers. New Yorkers are inherently smart and they laughed at that. We know we all make mistakes. There's no way you can pass an argument that say, these people are too smart to do these stupid things. And we know that the average people, especially when they're covering up, do stupid things. It's hard to keep a lie straight, by the way. ZAHN: Is there anybody rallying around her tonight?

GASPARINO: Well, you've got the save-Martha people. I think they're in your green room right now.

(LAUGHTER)

GASPARINO: Listen, I'm just a simple country reporter. I write the facts. I mean, her story sounded absurd. Martha Stewart may be a wonderful woman, but her story sounds absurd.

ZAHN: And there's no doubt in your mind she ends up spending time

(CROSSTALK)

GASPARINO: I think so. I think so.

It's a horrible end. One of the interesting things -- I've talked to people in recent weeks that know Martha. And they said, basically, she's actually now making an effort to be nice to people. And I think there was another factor of trial that came out, that, for years, she was just so nasty. And I think the jurors came back and said, you know, this person could do something this stupid. She's that nasty and that greedy. It came out that she was basically charging the company for $10 coffees. That's insane.

ZAHN: So the bad karma came back to bite her?

GASPARINO: Absolutely.

ZAHN: Charles Gasparino, you were at times an unpopular guy, because you were the only one from the very beginning, even before this trial got under way...

GASPARINO: Right.

ZAHN: ... that was absolutely convinced it would end up this way.

GASPARINO: Yes.

ZAHN: We'll have to have you -- bring you back at the top of every trial to see if you're also right.

GASPARINO: Any time.

ZAHN: Thank you.

Who is Martha Stewart and where did she come from? We're going to profile her beginnings and business success on the way up.

And what happens to the company she started? Hundreds of jobs and an empire of style are in the balance. Can the company that carries her name survive?

(BEGIN VIDEO CLIP)

MARTHA STEWART, DEFENDANT: Well, but that, having done nothing wrong allows to you sleep, allows you to continue your work, gives you -- gives you the opportunity to think about other things. But there's also the worry. A trial is coming up.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

ZAHN: The verdict against Martha Stewart is just one more remarkable turn in her life, until now a remarkably charmed one, as we hear from Sharon Collins.

(BEGIN VIDEOTAPE)

SHARON COLLINS, CNN CORRESPONDENT (voice-over): In the 1960s, Martha Kostyra was deep into studies at Barnard, an elite college in New York City. Just 20 minutes away from her childhood home, it was a world away in sophistication.

To help pay school bills, Martha applied and was chosen to appear in "Glamour" magazine's best-dressed college girls of 1961. It was a big break for the smalltown girl and it got her noticed. She modeled for The Tareyton cigarettes, was a Breck girl, and made a Lifeboy soap commercial.

(BEGIN VIDEO CLIP, AD)

NARRATOR: Now an you can odor-proof your body.

(END VIDEO CLIP)

CHRISTOPHER BYRON, AUTHOR, "MARTHA INC.": She didn't do her own voice on Lifeboy, though, because she had a Jersey accent. So they did a voice dub for her.

COLLINS: The much-photographed girl from Jersey was about to make a serious change in her life. She tells "Glamour" magazine, life pleases her, in particular a young man named Andy.

Years later, when Martha published her "Weddings" book, she shared with the world a snapshot of her Andy, the man she married in 1961. Andrew Stewart was a law student and Martha was 19 years old.

After marriage, Martha stepped off the model runway and onto the floor of the New York Exchange. It was the late '60s. The market was strong and Martha's father-in-law, a broker, encouraged her to try her luck.

Stewart biographer Christopher Byron says Stewart was one of the first females on the floor.

BYRON: She was a stockbroker in a mini skirt and drop-dead blonde looks and did really well. COLLINS: The next stop for the Stewarts, suburban Connecticut. They flapped down $34,000 for an old house in Westport, renovated it themselves and dubbed it "Turkey Hill Farm." From this meager beginning grew a domestic multimedia corporation.

The company's foundation was scrumptious food. Headquarters was the kitchen at "Turkey Hill Farm." Martha, the former model and stock trader had a new career in mind, catering. She baked breads, whipped up chocolate moose and set pretty tables. The former straight-A student learned to present the perfect party.

In 1982, Stewart's first book, "Entertaining," the first-ever full color cookbook was published by Westport's Hostess Extraordinaire. More than a million copies of the book have sold. Stewart dedicated the book to her father for instilling in her a love for all things beautiful and to Alexis, her daughter, for her patience.

In 1987, Martha's work and life collided head-on. Her marriage was over. Andrew Stewart left Turkey Hill Farm. Six years later, Andy married Robin Fairclaw, once a flower consultant to Martha. Martha has said that, for years, she blamed herself for the divorce and she wondered, what did I do wrong? For Martha, the only answer was to keep on working. Writing more books. And, with Time Warner, she created a new magazine, Martha Stewart Living.

On the cover, Martha. Inside, more Martha. Martha was everywhere. The big question, would anyone want to buy that much Martha? The answer? A big yes. There were millions of people eager to live in Martha's world.

DIANE BRADY, "BUSINESSWEEK": She sort of hit as common nerve in a lot of people. A friend of mind calls it homemaker porn, essentially. It's aspiring to a life style you can't have. It's a fantasy world.

(END VIDEOTAPE)

ZAHN: And clearly hitting a different kind of vein with the jury today. That was Sharon Collins reporting.

You can join me for more about how Martha Stewart built her career Saturday on "PEOPLE IN THE NEWS." That will be on at 11:00 a.m. Eastern right here on CNN.

Meanwhile, Martha Stewart says she'll appeal. But why did the result take so many by surprise? We'll look at what went wrong for the defense.

And there may be plenty of jokes about it, but actually going to prison is not one of them. If the judge does end up sentencing her to a prison term, what will it be like to trade designer sheets for prison blues?

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP, "LARRY KING LIVE")

DONALD TRUMP, DEVELOPER/BUSINESSMAN: I'm devastated that Martha didn't testify. I would have said testify. When she said and her lawyer said, Martha Stewart is not going to testify, the whole jury went like this, as I read, and rightfully so. I wish I could have been there.

(END VIDEO CLIP)

ZAHN: Donald Trump has his ideas on whether Martha Stewart should have testified in her own defense. But what did go wrong, leading to today's verdict of guilty on all four counts.

Senior legal analyst Jeffrey Toobin is back. And from Aspen, Colorado, tonight, criminal defense attorney Mickey Sherman.

Welcome, both of you.

So, Mickey, do you think Martha Stewart should have taken the stand in her own defense?

MICKEY SHERMAN, CRIMINAL DEFENSE ATTORNEY: It's such an easy call after the fact. Only the attorney sitting in that seat, when the time comes, can really make that call. And it's just so easy to say, well, he should have done this, he should have done that.

In retrospect, sure, she should have done a lot of things, perhaps. But you can't judge that just simply by the verdict. And everything we know about this case and about Martha Stewart would have dictated and did dictate that she should not have taken the stand. The judge is ruling in her favor on all those phone calls. We know of her personality, which is supposed to be less than charming to a lot of people.

And there were a lot of questions which she would have had a very difficult time dealing with. So the decision was absolutely right. Maybe now, could you have second-guessed yourself? Absolutely.

ZAHN: Well, unfortunately, you know something about second- guessing. You lost a major high-profile trial in the Skakel case.

(CROSSTALK)

SHERMAN: Thanks for reminding me, Paula.

ZAHN: Well, yes, I know you live with that every day. I didn't mean that in a mean way.

But what do you think now, in retrospect, was the biggest mistake this team made?

SHERMAN: You don't know. You really don't know. Reading jurors are like tea leaves. And who is to say what the reaction would have been had she testified or whether or not they put on a more aggressive, affirmative case. You just can't go there. By the same token, just because they lost, doesn't mean they did something wrong. There are cases that are designed to be lost. When you have the might and the weight of the federal government against you, when it's United States of America versus Martha Stewart, those are overwhelming odds against you. Just when they just read the charges. And they have resources that are absolutely vast. And you've got agents and unlimited FBI people to work against you. You don't often win a federal case, period. Whether you're Martha Stewart or Frank Jones.

ZAHN: Yet, everything didn't go right for the prosecution team, Jeffrey.

TOOBIN: It didn't. Remember this is the judge who threw out the securities fraud count. As Mickey mentioned, some of the phone calls, very incriminating timed phone calls between Martha Stewart and Peter Bacanovic, the judge said, those are inadmissible because we don't know what was said. So, the judge gave the defense a lot of breaks in this case, which, by the way, I think means their appeal has no chance of success. So they had their chance. Their problem was the evidence. There's not much you can do about the evidence.

ZAHN: Let's quickly review what both sides had to say shortly after the verdict late this afternoon.

(BEGIN VIDEO CLIP)

DAVID KELLEY, U.S. ATTORNEY: If you are John Q. Citizen or Martha Stewart or Peter Bacanovic, we're going to go after you if you make these types of lies.

We do cases each and every day. We do large ones we do small ones.

ROBERT MORVILLO, DEFENSE ATTORNEY: We are confident that once we get our day in the court of appeals, the conviction will be reversed and Martha Stewart will ultimately be determined not to have done anything wrong.

(END VIDEO CLIP)

ZAHN: So Mickey, how tough is it to get a conviction overturned on an appeal?

SHERMAN: Unless you have some really great legal issues, it's near impossible. Appellate courts do not want to overturn the will of a jury, that's such an American democracy at work. That they just do not want to touch a jury verdict unless there's some real problems there. They've got a big uphill battle.

TOOBIN: Especially, when a judge like this one, gave the defense a lot of breaks. And a lot of rulings during the trial.

ZAHN: So you're saying, Mickey, no shot at all here?

SHERMAN: No. Definitely not. There's always a shot. You never know. You lose cases you're supposed to win and win cases you're supposed to lose. And who knows what the appellate court is supposed to do? I wouldn't rule it out totally, but I'd be spending a lot of time preparing her for her sentence right now.

ZAHN: Well, I've got to tell you, Mickey, you've got Jeffrey and me jealous that you're sitting in front of a fireplace in Colorado. Go take a break, relax. Thanks for joining us tonight, Mickey Sherman, Jeffrey Toobin. We'll be back in a little bit.

Coming up, designer goods and a multimedia empire built on a single name. What effect will the Martha Stewart conviction have on the Martha Stewart brand?

And not all prisons are created equal. If Martha Stewart does go to jail, what are the possibilities and what are some of the dangers?

(BEGIN VIDEO CLIP)

LARRY KING, HOST LARRY KING LIVE: How about dealing with joke, people on late night television who spare no one?

MARTHA STEWART, BUSINESSWOMAN: My buddies, you mean?

KING: The Lenos and the Lettermans and the Kimmels and the Conans.

STEWART: And again, it's their job.

(COMMERCIAL BREAK)

ZAHN: As you might expect, it was a roller coaster day for Martha Stewart's company. Shareholders of Martha Stewart Living Omnimedia acted on the rumors and pieces of information that came out of the courtroom. Shares of the company actually rose nearly 20 percent today at one point as many thought Stewart would be acquitted.

Trading was halted briefly during the verdict announcement, and when shareholder learned that Stewart was, in fact, found guilty, they dumped the stock.

Stewart's company closed down 23 percent, the largest percentage loss today on the New York stock exchange. Jen Rogers looks at how the company will try to recover.

(BEGIN VIDEOTAPE)

JEN ROGERS, CNN CORRESPONDENT (voice-over): Her company is called Martha Stewart Living Omnimedia. Now, following Friday's verdict, those first two words are synonymous with a convicted felon. That alone would be a huge hurdle to overcome, but the issue is not only the name, but that the brand is so intimately tied to Stewart herself. Her life style and her image.

Already, during the scandal, the company has struggled, cutting ad rates for "Martha Stewart Living" magazine and agreeing to reduce licensing fees for syndicated programs. Keeping advertisers will remain an uphill battle.

UNIDENTIFIED MALE: Martha Stewart's been found guilty of a crime. And advertisers are going to be unwilling to do business with the company for that reason.

ROGERS: Stewart relinquished her chairman and CEO title in June and no longer has day-to-day control of the company she founded. But she's still chief creative officer and a member of the board of directors. That board following the verdict announced it would meet promptly to evaluate the situation. And said, "we are confident that our assets are more than sufficient to continue MSO's development as a leading "how-to" brand building company."

Expectations are that the company will push ahead, but also distance itself from the domestic diva. One new initiative, a magazine called "Everyday Food" which does not feature Stewart.

While the verdict came down in court today, the jury is still out in the court of public opinion. The question remains, will consumers still embrace Martha Stewart as a product, despite what has happened to Martha Stewart, the person? Jen Rogers, CNN financial news, New York.

(END VIDEOTAPE)

ZAHN: More now on what Martha Stewart's company can do next. Jeff Sonnenfeld joins us from New Haven, Connecticut. He is the president and CEO of Yale's chief executive leadership institute. And Eric Dezenhall, president of Dezenhall resources. He joins us from our Washington bureau. He is an expert on pulling a company out of a crisis. Welcome.

So, Eric, is this a fatal blow to Martha Stewart's brand.

ERIC DEZENHALL, DEZENHALL RESOURCES: It's fatal as she knows her career to be today. It's entirely possible that five years from now, if she goes away for a while, no pun intended, she can come back with a smaller enterprise.

I think the problem with an icon like this is they tend to want to come back as big as they were before and people expect them to come back as big as they were before. But the real model here is to see whether or not you can do triage just like in the trauma room and save what can assets can be saved. That's not all of them.

ZAHN: So, Jeff, how would she ultimately rehabilitate her image now that she's a convicted felon?

JEFF SONNENFELD, YALE UNIVERSITY: Well, I think it's great that just before the break, you had Donald Trump, another eponymous name, same-named company individual. Donald Trump didn't do anything wrong or illegal, but he certainly did face financial distress. And he projects an image of success and had to bring all that back, and he's done a spectacular job.

You can look at Steve Madden. I disagree with Eric on this a little bit. Steve Madden, been running for the last almost 50 months out of a prison cell. His design company that has flourished in the period of time he's, quote unquote, been on sabbatical as the chief creative officer. In prison, they've gotten to 3,000 stores. They're in the toniest locations. People want to do business with him.

Michael Milken, a convicted felon. You find all kinds of world leaders, scientists, CEOs and clergy race out to his institute to work with him now. So, I think that an individual can recover the name.

The company is another issue. Some of our greatest iconic companies from Xerox to Boeing to International Paper have been filled with convicted felons and criminal acts and they've come back quite successfully. It's not easy, but you can do it.

ZAHN: So Eric, given what Jeff has just had to say, do you see a scenario where Kmart keeps Martha Stewart's face plastered over the packaging of their products that she's endorsed?

DEZENHALL: I really don't right away. I don't know of anybody as big as Martha Stewart who has been convicted of something so serious in such a hostile climate as today who has come back that way. There have been plenty of comebacks. Michael Milken came back but he also wasn't necessarily a brand and he had to go to prison for a long time, get cancer, and become a philanthropist and only 15 years later did he begin to recover.

I think Martha Stewart can come back to some of this, but she'll have to go away from the public eye. There's a tendency to think in these PR situations, these celebrities always want people to see more of them. If only people saw more of me, then this problem would be over. When sometimes the answer is people need to see less of you. She has to be willing to do that.

ZAHN: I think the one thing that came through in some of the jurors' comments today, Jeff, is just what an unsympathetic character she was to them. I wanted you to read between the lines here. When her company put out this statement earlier today, saying -- or actually yesterday, the company had, quote, "contingency plans in place in case Stewart was found guilty." What do you think those plans are?

SONNENFELD: Just between we close friends we actually had, in the last two few conferences back, we had Martha Stewart and Sharon Patrick, perhaps her last good day on earth, one or two days later, she was charged. And one of the that we were wrestling with, among all the CEOs that kept pushing her, that what if you're hit by a bus. This is being hit by a bus.

They were already -- there's great frustration in developing a succession plan. With Sharon Patrick planning to take over and trying to find alternative images. They had the "Everyday Eating" and the "Good Organizing" magazines in the works. They were taking things away from the image of Martha Stewart. They have a big governance problem here. They've got a tiny board, and it weighs down heavily on these people. You've had the succession issue. I think they can get through the succession issue with some of the governance concerns. You still have some of the gnawing injustice.

You know, when Eric says maybe a little time away. I don't agree. The flight or fight issue, they've got -- she's got to engage and stay part of the public profile and I think that she'll work her way out of this, possibly, if she stays at it. You have to show some contrition though. If Jimmy Swaggart and Bill Clinton and others when they finally shed the tear, the American public is enormously forgiving.

But I think you're right. The unsympathetic image makes you wonder, even as much as I admire Mr. Trump, I don't think she'd have been a great witness and they made the right call to not have her testify, though we do often second guess.

ZAHN: We'll leave it there. Jeff Sonnenfeld, Eric Dezenhall, thank you. Appreciate it.

Prison walls are a distinct possibility for Martha Stewart. Could she escape the fate of a jail cell? And what is typical punishment for a white collar criminal?

And Martha Stewart's style. It made her millions. In fact, billions on paper. It also produced millions of laughs for comedians. An American icon tumbles.

(COMMERCIAL BREAK)

ZAHN: "LARRY KING LIVE" straight ahead with another hour on the Martha Stewart verdict. His guests include Stewart's friend, Dominick Dunne, who also covered the trial. And we continue now with our Stewart coverage. What does her future look like?

She faces sentencing on June 17. Each of the counts carries a maximum five-year prison sentence. There's a chance though that she may just pay a hefty fine and not spend a day in prison. Joining us, legal analyst Jeffrey Toobin is back. And someone who has written extensively on prisons for white-collar criminals, not that she's been in one, but has observed what goes on there. Penelope Patsuris from Forbes.com. First, Jeffrey, will Martha Stewart end up in prison when June 17 comes around?

TOOBIN: Almost absolutely sure. There's a slight chance she can avoid prison, but it's far more likely after being convicted of all counts that she's looking on something in the order of 12-18 months, 18-24 months which in the federal system means you serve at least 85 percent of what you get. She's going to prison.

ZAHN: Where could she end up?

PENELOPE PATSURIS, FORBES.COM: I think she's probably going to end up in the Danbarry (ph) Minimum Security Federal Prison Camp...

ZAHN: In Connecticut. Not far from her home.

PATSURIS: Not far from her home. That's probably because sentencing judges do like to put prisoners nearby their family so that they can have visits. And it's the only facility in the northeast that houses -- minimum security facility in the northeast that houses women.

ZAHN: Can she make a request where she wants to go?

PATSURIS: She can. Doesn't mean it's going to be successful. Sam Waksal wisely asked for Eglin, the camp for which the term "Club Fed" was coined.

ZAHN: And they gave it to him?

PATSURIS: No, he didn't get it. It doesn't hurt to ask. They do listen. They do listen.

ZAHN: Let's talk about what prison life might be like for Martha, depending upon where she ends up. Tell us about the rules that she would have to follow and what she's up against.

PATSURIS: Well, there is a very important unwritten code that I've been told about by an ex-con who served for insurance fraud, and you have about a month to pick up on it. It's pretty straightforward. Don't rat out your fellow prisoners, don't cut in line. Don't reach across the dinner table. Don't ask personal questions, and that's about it.

ZAHN: Will her celebrity help or hurt her?

PATSURIS: I think that's going to be really interesting to find out. She could definitely be a focus of a lot of resentment for obvious reasons, very wealthy and so forth. But then, I wonder. I do wonder if these women serving time who don't have a lot else going on might just be fascinated with her and might really look to her for a little guidance and information. I mean, not that they're all going to sit around decorating their cells, but I do wonder if they'll be starstruck or resentful.

ZAHN: It's interesting, because what I've gleaned from -- what little we've heard from the jurors so far, there was so little empathy for this woman. The jurors couldn't relate to her. Someone was saying -- I heard a female judge saying tonight, I don't know where her advisers were. I don't know who allowed her to walk into the courtroom with a $12,000 handbag. There was nothing about her appearance that related to jury members. You're sitting at home tonight, you're Martha Stewart, you're kicking yourself saying what?

TOOBIN: You are saying so many things. This is such an avoidable crime. The stupid lie that she told.

ZAHN: You're saying this was a voluntary crime?

TOOBIN: This wasn't about greed. She didn't make millions of dollars. This wasn't about lust. This was just stupidity and arrogance. She could have said nothing. This is a crime -- she wasn't charged with insider trading. If she'd simply said nothing, taken the Fifth, taken the embarrassment that went with that, she'd be home -- a free woman tonight. Or if she'd simply told the truth and said, well, you know, maybe I made a mistake, I'll give the money back. This case is over and forgotten. She made every wrong decision. I mean, I don't even care about her, and it drives me crazy. Imagine how it must drive her.

ZAHN: I still don't understand why she talked to the SEC. Did the attorney say talk? I know she didn't want to face the embarrassment of the public image that might have been damaged by looking like she was avoiding questions...

TOOBIN: I think that's a big part of it. And also, this is a woman who has been a winner a long time. She's a professional communicator. Remember she said that to me when I interviewed her. You know, I'm a professional communicator. She thought those skills could translate to a room when you're being cross-examined by a government lawyer. Didn't work.

ZAHN: Jeffrey Toobin, Penelope Patsuris, thank you.

Love her or hate her, Martha Stewart made her mark. What's it like to be a target at the top? The humbling of Martha Stewart next.

(BEGIN VIDEO CLIP)

STEWART: I think that fame sometimes leads to problems. And I mean, when I was a youngster, I noticed that it happened to James Dean, my hero. It happened to Elvis Presley, my hero. Why? Why? Why didn't anybody take care of them? I mean, those are famous people. I don't consider myself in that league whatsoever, Larry.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

JAY LENO, HOST, TONIGHT SHOW: I love this. In their closing arguments, lawyers for Martha Stewart told the jurors that she's way too smart to commit the crime she's charged with. That will get the jury on your side. Unlike you idiots who are too stupid to get out of jury duty, my client is a multimillion dollar genius.

(END VIDEO CLIP)

ZAHN: Well, Jay Leno isn't the only one who has targeted Martha Stewart's image and reputation could spoil more with her conviction. Joining us now to discuss the fall of an American icon is John Small, editor of SaveMartha.com, Andrea Peyser, who has written about Stewart now for "The New York Post" for quite some time, and once again, legal analyst Jeffrey Toobin. Welcome back.

So, John, you still believe she's innocent after today?

JOHN SMALL, SAVEMARTHA.COM: I believe that Martha got a raw deal. This was a tempest in a cuisinart, and the cuisinart exploded today. And the collateral damage was extensive. We're talking over $1 billion in lost value of her company. I heard that this investigation cost $40 million. I don't know if that's true. But whatever it cost was way too much in proportion to what she did.

ZAHN: So she's lost no credibility in your eyes based on the verdict today?

SMALL: Martha's fans will stand behind her. Now, this has implications for her stock. We know that. But on my site we have been taking polls of this. And 20 percent of the users, of the viewers, say they will actually buy more of Martha's products, not less.

ZAHN: What does your cup say that you brought in tonight?

SMALL: Well, we have a "Save Martha" cup that said, "if her stock sale is legit, you must acquit." Obviously, the jurors didn't get that message.

ZAHN: And you saw what happened to that stock price today, the single largest drop of any stop on the exchange -- or stock on the exchange today. Andrea, you have been convinced of her guilt for some time. You've written extensively about it. Do you feel vindicated now?

ANDREA PEYSER, NEW YORK POST: Well, yeah. I mean, it was a bit lonely there for a while, because I sometimes felt like I was in an alternate reality, because here is one piece of evidence after another after another that these people committed this crime. It's a crime. And we're hearing, oh, well, people do worse things and people are much more worse hoodlums and they defraud more people and they steal more money. And that is an excuse. They were guilty. It was so obvious to me from the beginning, and the jury, believe it or not, came in and they saw exactly what I saw.

ZAHN: What about the opinion I've heard expressed a couple of times today, that this wouldn't have happened if she'd been a man. That she was treated that way because she, first of all, she had no empathy from anybody that worked with her, but more importantly, juries aren't used to dealing with powerful women.

PEYSER: I have been insulted by this from day one. On the one hand, she's this powerful, smart, intelligent woman. On the other hand, she doesn't want to take responsibility. She's not accountable when she does something wrong, which way is it? Are you...

ZAHN: It's the victimization trap.

PEYSER: It's ridiculous. I think it was a tactic that backfired big time, and I didn't buy it.

ZAHN: On a personal level -- I mean, you must have been relieved because you've written so negatively about it. But was there a part of you that wanted to see her go down because she had this arrogant image in public?

PEYSER: Well, arrogance is part of her undoing. But it's arrogance in the fact that she will not take responsibility for her actions. Then, it's, you know, she can do the crime, but then it's like, well, you're out to get me. Well, did you do it or did you not? Well, yes, I did, and you're out to get me. Which way do you want it?

TOOBIN: Well, even today, even today after the verdict, this stupidity with her Web site that at first she says I've done nothing wrong. Then she takes away that I've done nothing wrong. I mean, you know...

ZAHN: And you say that there's a legal reason for her removing that from her Web site.

TOOBIN: That's right. But there's no sincerity involved here. This is just the lawyer saying no, you can't, you can't say I've done nothing wrong, because that means you might not get the two points off under the federal sentencing guidelines for acceptance of responsibility. There's no sincerity here.

Even at this point, what difference does it make what she says, because her credibility is so tarnished. And Andrea, you know, I sat with Andrea in court every day. And you know, she was known as the toughest on Martha. But you know, compared to the jurors, Andrea was a pussycat.

ZAHN: Do you feel like mincemeat tonight, John?

SMALL: Oh, my God, we're getting beat to a pulp.

ZAHN: It's a lonely place you're standing in.

SMALL: I mean, this is...

TOOBIN: That's what happens when you're convicted on all counts.

SMALL: It's actually -- it's actually not so lonely. We've had over 30 million hits on SaveMartha.com. Over 100,000 e-mails sent to John Ashcroft, sent to advertisers, sent to CBS, because we want them to put Martha back on in the morning, not at 2:00 at night.

ZAHN: OK, and simply put, you've always viewed this from day one as nothing more than a witch hunt?

SMALL: It's a tempest in a cuisinart. What kind of country is it where O.J. Simpson goes free for murdering his wife, and Martha Stewart is convicted of lying about a crime she didn't commit?

ZAHN: Oh, no, (UNINTELLIGIBLE). Criminal trial, criminal trial, we don't have time to go there.

Andrea, final thought on what you think Martha Stewart faces now, besides spending some time in prison.

PEYSER: Well, she's going to spend some time in prison, and I hope she thinks about it. I hope that she will get out there and admit that she did something wrong. Then, maybe I'll buy a Martha Stewart mug or something if this woman can admit it.

ZAHN: You say there's a fat chance of that happening. TOOBIN: No chance. You know, "Martha Stewart Living" is a wonderful magazine. Her products at K-Mart are terrific. But -- and it's for the stupidity, she threw it all away.

ZAHN: Jeffrey Toobin, Andrea Peyser, John Small, thank you all for joining us tonight.

SMALL: Save Martha.

ZAHN: Appreciate your all being with us. Have a great weekend. We'll be back same time, same place, on Monday night. "LARRY KING LIVE" is next.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com







Aired March 5, 2004 - 20:00   ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
(BEGIN VIDEO CLIP)
DAVID KELLEY, U.S. ATTORNEY: If you are John Q. Citizen or Martha Stewart or Peter Bacanovic, we're going to go after you if you make these types of lies.

ROBERT MORVILLO, ATTORNEY FOR MARTHA STEWART: We are confident that once we get our day in the court of appeals, the conviction will be reversed.

(END VIDEO CLIP)

PAULA ZAHN, CNN ANCHOR: Tonight, the verdict in the Martha Stewart case, guilty on all four counts of conspiracy, obstructing justice and making false statements. We're going to spend the next hour on the Stewart case, what she could face at sentencing, what it means for her career and her company, and what life behind bars would be like for the icon who made her living dictating style.

And good evening. Thanks so much for joining us tonight. Welcome. I'm Paula Zahn.

First, for what you need to know about the Stewart verdict, we go live to Deborah Feyerick, who joins us tonight from outside federal court in Manhattan.

Good evening, Deborah.

DEBORAH FEYERICK, CNN CORRESPONDENT: Well, good evening, Paula.

Martha Stewart never broke character. She remained poised, looking straight ahead the entire time the verdict was read. The judge read each count in quick succession. Martha Stewart not smiling, not crying, doing nothing but looking straight ahead as everything was done.

(BEGIN VIDEOTAPE)

FEYERICK (voice-over): Her daughter bowed her head and wept, but Martha Stewart showed no emotion as the verdict was read, a jury finding Stewart guilty on all counts of lying to investigators about her sale of ImClone stock and conspiring with her broker to cover it up.

Her broker, Peter Bacanovic, was found guilty on four of five counts. Lawyers for both vowed to appeal. MORVILLO: We are disappointed at the outcome. We look at this as having lost the first round. We look at this as an opportunity for us to go to the next rounds and to explain to the court of appeals what we think went wrong in this case.

FEYERICK: Prosecutors called the verdict a warning to others in corporate America.

KELLEY: We will not and frankly cannot tolerate dishonesty and corruption in any sort of official proceeding.

FEYERICK: Immediately after the verdict, 11 of the 12 jury members left through a side door. One stayed to talk. Among the strongest evidence, he said, Stewart's traveling companion, who testified that Stewart told her about the ImClone stock sale, saying, "Isn't it nice to have brokers to tell you those things?" the jury not buying the defense argument that there was no cover-up.

CHAPPELL HARTRIDGE, MARTHA STEWART JUROR: I guess the cover-up began when Merrill Lynch started to do their internal investigation and Peter realized that, oh, boy, I better start covering things up.

FEYERICK: Hartridge said it didn't bother the jury that Stewart did not testify in her own defense, though he said it did bother him that Stewart's team put on only one witness, giving the impression there was nothing to worry about.

(END VIDEOTAPE)

FEYERICK: Stewart will be sentenced on June 17. She faces a maximum of 20 years in prison for all of the counts. It's likely she will serve a lot less -- Paula.

ZAHN: What else, Deborah, did you learn from jurors today?

FEYERICK: It was very interesting. Only one of the jurors spoke. And another thing that he said, he really felt that Annie Armstrong, Martha Stewart's secretary, gave very strong testimony, specifically, the message that Martha Stewart tried to change.

Her defense lawyers had said she was simply changing it to reflect what she remembered being told when she was given the message. But it was too much. The jury really believed that that was simply part of the larger conspiracy. And, again, out of all eight counts -- out of four counts for Martha, she was found guilty on all of them. Out of five counts for Peter Bacanovic, he was found guilty on four of them.

ZAHN: Certainly a dramatic turn of fate for Martha Stewart. Thanks so much, Deborah Feyerick.

"In Focus" now, let's dig a little deeper into the legal drama of the Martha Stewart trial.

Senior legal analyst Jeffrey Toobin is here with us tonight.

Good evening.

JEFFREY TOOBIN, CNN SR. LEGAL ANALYST: Hi.

ZAHN: You come at this from a very interesting perspective. You're a former prosecutor. You spent time with Martha before she was indicted. You talked to her extensively about the potential of the case. You didn't believe she had done anything wrong.

TOOBIN: You know, I interviewed her on a memorable January afternoon a year ago for "The New Yorker." And we talked about the case and I was a believer. I thought she was getting a raw deal.

And I sat in that courtroom day after day and I realized that Martha Stewart lied in my face, the way she lied in the face of these FBI agents and SEC lawyers. Her story was simply implausible. And the jury rejected it because it wasn't true.

ZAHN: So you're pretty much telling us tonight you are certain that she spends time in jail?

TOOBIN: Absolutely. Under the federal sentencing guidelines, there is a little play in the joints. Certainly, there will be a fierce legal argument in front Judge Cedarbaum.

But the way I figure the federal sentencing guidelines, she's looking like something like 12 to 18 months, 18 months to 24 months, and no parole in the federal system. She'll serve 85 percent of whatever sentence she gets.

ZAHN: You just made it very clear you felt duped by her.

Let's put on the screen right now something that appeared on her Web site, when she reacted to her verdict. She says: "I'm obviously distressed by the jury's verdict, but I continue to take comfort in knowing that I have done nothing wrong and that I have the enduring support of my family and friends. I will appeal the verdict and continue to fight to clear my name. I believe in the fairness of the judicial system and remain confident that I will ultimately prevail."

Well, guess what? Seven of those words disappeared from the Web site. Guess which ones? "I have done nothing wrong."

TOOBIN: She's still playing games. It's just ridiculous.

And the reason those seven words came out is that, under the federal sentencing guidelines, you can get a lesser sentence if you accept responsibility. She's starting to move into a position of accepting responsibility.

ZAHN: Well, isn't that a little late?

TOOBIN: It's a little late, and you know, to make a silly mistake like that just shows that she's not accepting responsibility, that she still thinks she's done nothing wrong.

ZAHN: It was really fascinating to hear today what one of the few jurors who talked publicly had to say about how they arrived at the decision they did. Let's listen to this together.

(BEGIN VIDEO CLIP)

HARTRIDGE: What message does this send to investors? Maybe to the middle investor, they may feel a little bit more comfortable that they can invest in the market and not worry about these type of scams where they can lose their 401(k)s or just lose money on any plain stocks.

(END VIDEO CLIP)

ZAHN: With as this all from the jury's perspective about a message of sending a very powerful message to the rich and powerful? Did she stand a chance with this jury?

TOOBIN: I think she did. Given the notes that this jury sent, this is a jury that went through the evidence meticulously.

I'm uncomfortable with juries that are trying to send messages, who are trying to do something larger than what the evidence in front of them requires. I'm uncomfortable with jurors talking that way in sort of class-warfare language. Given what I saw of how the jury acted, I think that comment was inconsistent with the rest of the jury's action.

ZAHN: Describe to us the reaction in the courtroom when the verdict came down.

TOOBIN: Very interesting. The jury, when they walked in -- oftentimes, when juries convict, they look exhausted. They look emotionally drained. This jury actually looked almost chipper. They did not seem to worry about this verdict. They did not seem to have it weigh heavily upon them. They walked in rather matter-of-factly.

Some of them had sort of half-smiles on their faces. They didn't look at the defendant, which is always a tipoff that they're going to convict. And as for Martha Stewart herself, the same impassive demeanor. She didn't want to see anyone -- let anyone see what she was feeling inside. Only her daughter, Alexis, you know, broke down in the courtroom.

ZAHN: There are defenders out there tonight of Martha Stewart who say, the reason why she ended up getting convicted was because she was a woman, the jurors aren't used to dealing with women who run billion-dollar empires, and if this had been a man found guilty of the same thing, he not have faced the same wrath.

TOOBIN: I felt a lot that way.

ZAHN: You did?

TOOBIN: Until I listened to the evidence in the case. The evidence in the case is what determined it, not because she's a woman, not because she's a Democrat. Yes, she is all those things, but she lied to these agents and she got caught. That was her problem.

ZAHN: Jeffrey, please stand by.

Joining us from federal court in Lower Manhattan, "People" magazine's Sharon Cotliar.

Always good to see you, Sharon.

SHARON COTLIAR, "PEOPLE": Hi.

ZAHN: I wanted to ask you about something Douglas Faneuil's attorney had to say right after the verdicts. Let's all listen to this.

Actually, I'm going to read it to you. It says: "He came forward because his conscience told him it was the right thing to do. He was solely a witness telling the truth."

Was he the linchpin of the prosecution's case?

COTLIAR: He was certainly a key factor in the case. But the juror that we did speak to did say that Annie Armstrong, Martha's assistant, and Mariana Pasternak, Martha's best friend, played very critical roles in this. So, in fact, it was the people closest to her who really had an impact on the jury and ultimately led to her being convicted, it seems.

ZAHN: Now, have you gotten any reaction from his camp about how he's dealing with the news of this verdict?

COTLIAR: In terms of Douglas Faneuil?

ZAHN: Yes.

COTLIAR: It's got to be mixed emotions for him tonight. I mean, on one level, he's got to be relieved, because his role is over in this. He's testified. He probably won't have to be involved anymore. And, on the other hand, this is a position he never wanted to be in.

ZAHN: I've been fascinated by the e-mail I've gotten here tonight, pretty evenly split between those folks who thought the government was on a witch-hunt, with those who actually think this is absolutely the right punishment.

Rosie O'Donnell made this statement shortly after the verdict -- quote -- "This is unbelievable. I am outraged and beside myself. This is a travesty. Shame on the federal government."

How much, though, of all the wrath she faced had something to do, Jeff, with the fact that she's a public figure?

TOOBIN: I think prosecutors do have a right and, in some respects, it's OK to go after public figures to make an example of them, if they are, in fact, guilty. And I think that's what went on here. They did go after Martha Stewart to make an example of her of someone who lied to FBI agents and got caught. There's nothing wrong with having a deterrent effect in prosecutions, as long as the target is guilty. ZAHN: You were talking about the somewhat impassive reaction of the jury as they came into the courtroom after the deliberations were over.

Describe to us, Sharon, about Alexis, Martha Stewart's daughter, one of the few people to really react quite emotionally in the courtroom.

COTLIAR: Yes, her reaction was incredibly dramatic.

While her mother really remained composed, Alexis, actually, once the jury was out, had her head in her hands. She was slumped over on the bench. I mean, this certainly hit her hard. I think it's pretty safe to say she was, you know, she really felt rocked by this verdict.

ZAHN: Sharon Cotliar, thanks so much for being with us tonight.

Jeffrey Toobin, you're going to be a busy guy. You're going to hang out with us all night long. Thank you.

COTLIAR: Thank you.

ZAHN: It was a friendship with a biotech CEO that led to Martha Stewart's troubles. We're going to trace the financial links that led to her downfall.

The verdict came in and the stock tanked. We're going to look at what's in store now for the business empire Martha Stewart built on selling good taste.

And, if Martha Stewart is sentenced to prison, what kind of a person and what kind of a lifestyle? We're going to look at the possibilities she might face in prison.

(COMMERCIAL BREAK)

ZAHN: Welcome back.

So how did we get here? What sparked the case that led to Martha Stewart's conviction?

Joining us now to talk about how it all unfolded, someone who has closely followed the case from the beginning, Charles Gasparino, a senior special writer at "The Wall Street Journal."

Good to see you.

CHARLES GASPARINO, "THE WALL STREET JOURNAL": Thanks for having me.

ZAHN: How did this all start?

GASPARINO: It started with a some guy, a clerk at Merrill Lynch named Shrimphauser (ph), who was basically looking at suspicious trades in ImClone stock back in 2000, back in 2000, and basically followed that up and saw that Martha Stewart was one of the people who traded around the time that Sam Waksal tried to trade before the ImClone announcement.

ZAHN: But she wasn't in a lot of trouble at that point. The trouble came after she spoke with the SEC.

GASPARINO: Yes, and right. But she spoke right after that, by the way.

The SEC was on it pretty fast. You have to remember, Merrill Lynch monitored the trades. Mr. Shrimphauser sent his information to the compliance department. They sent it to the SEC. And her name came up. And, basically, they started interviewing her right away, although, at first, their target was Waksal. It wasn't her. It was the lies and the sort of misstatements that led them on the trail.

ZAHN: So, if you were trying to reduce this to one little sliver of untruth, where did she really blow it?

GASPARINO: She blew it the first day. She should have just told them the truth. Her story was so obviously absurd from day one that you couldn't help but follow up. And the more people followed up, the more they asked questions, the deeper it got for her.

ZAHN: Why did she talk in the first place?

GASPARINO: Well, that's a good question. If you're CEO of a public company, you almost have to talk. If you don't, it's like the sin of omission. But she

(CROSSTALK)

ZAHN: But she could have gotten away without talking.

GASPARINO: She should have told the truth.

Listen, you could have a $60 stop-loss arrangement and then Doug Faneuil calls you up and gives you a tip that Waskals are saying -- suppose she just said, hey, listen, I made a snap decision. We had some arrangement one day. This guy calls me up the next day. I'm flying to Mexico and I just traded. And you know what? I think that would have worked. She wouldn't have been in this position right now.

ZAHN: Fast-forward to closing arguments, where her defense attorney basically referred to this all as the conspiracy of dunces, saying, these are smart people. They would have covered their tracks better if they'd really done what you're accusing them of doing.

(CROSSTALK)

GASPARINO: Right.

These are average New Yorkers. New Yorkers are inherently smart and they laughed at that. We know we all make mistakes. There's no way you can pass an argument that say, these people are too smart to do these stupid things. And we know that the average people, especially when they're covering up, do stupid things. It's hard to keep a lie straight, by the way. ZAHN: Is there anybody rallying around her tonight?

GASPARINO: Well, you've got the save-Martha people. I think they're in your green room right now.

(LAUGHTER)

GASPARINO: Listen, I'm just a simple country reporter. I write the facts. I mean, her story sounded absurd. Martha Stewart may be a wonderful woman, but her story sounds absurd.

ZAHN: And there's no doubt in your mind she ends up spending time

(CROSSTALK)

GASPARINO: I think so. I think so.

It's a horrible end. One of the interesting things -- I've talked to people in recent weeks that know Martha. And they said, basically, she's actually now making an effort to be nice to people. And I think there was another factor of trial that came out, that, for years, she was just so nasty. And I think the jurors came back and said, you know, this person could do something this stupid. She's that nasty and that greedy. It came out that she was basically charging the company for $10 coffees. That's insane.

ZAHN: So the bad karma came back to bite her?

GASPARINO: Absolutely.

ZAHN: Charles Gasparino, you were at times an unpopular guy, because you were the only one from the very beginning, even before this trial got under way...

GASPARINO: Right.

ZAHN: ... that was absolutely convinced it would end up this way.

GASPARINO: Yes.

ZAHN: We'll have to have you -- bring you back at the top of every trial to see if you're also right.

GASPARINO: Any time.

ZAHN: Thank you.

Who is Martha Stewart and where did she come from? We're going to profile her beginnings and business success on the way up.

And what happens to the company she started? Hundreds of jobs and an empire of style are in the balance. Can the company that carries her name survive?

(BEGIN VIDEO CLIP)

MARTHA STEWART, DEFENDANT: Well, but that, having done nothing wrong allows to you sleep, allows you to continue your work, gives you -- gives you the opportunity to think about other things. But there's also the worry. A trial is coming up.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

ZAHN: The verdict against Martha Stewart is just one more remarkable turn in her life, until now a remarkably charmed one, as we hear from Sharon Collins.

(BEGIN VIDEOTAPE)

SHARON COLLINS, CNN CORRESPONDENT (voice-over): In the 1960s, Martha Kostyra was deep into studies at Barnard, an elite college in New York City. Just 20 minutes away from her childhood home, it was a world away in sophistication.

To help pay school bills, Martha applied and was chosen to appear in "Glamour" magazine's best-dressed college girls of 1961. It was a big break for the smalltown girl and it got her noticed. She modeled for The Tareyton cigarettes, was a Breck girl, and made a Lifeboy soap commercial.

(BEGIN VIDEO CLIP, AD)

NARRATOR: Now an you can odor-proof your body.

(END VIDEO CLIP)

CHRISTOPHER BYRON, AUTHOR, "MARTHA INC.": She didn't do her own voice on Lifeboy, though, because she had a Jersey accent. So they did a voice dub for her.

COLLINS: The much-photographed girl from Jersey was about to make a serious change in her life. She tells "Glamour" magazine, life pleases her, in particular a young man named Andy.

Years later, when Martha published her "Weddings" book, she shared with the world a snapshot of her Andy, the man she married in 1961. Andrew Stewart was a law student and Martha was 19 years old.

After marriage, Martha stepped off the model runway and onto the floor of the New York Exchange. It was the late '60s. The market was strong and Martha's father-in-law, a broker, encouraged her to try her luck.

Stewart biographer Christopher Byron says Stewart was one of the first females on the floor.

BYRON: She was a stockbroker in a mini skirt and drop-dead blonde looks and did really well. COLLINS: The next stop for the Stewarts, suburban Connecticut. They flapped down $34,000 for an old house in Westport, renovated it themselves and dubbed it "Turkey Hill Farm." From this meager beginning grew a domestic multimedia corporation.

The company's foundation was scrumptious food. Headquarters was the kitchen at "Turkey Hill Farm." Martha, the former model and stock trader had a new career in mind, catering. She baked breads, whipped up chocolate moose and set pretty tables. The former straight-A student learned to present the perfect party.

In 1982, Stewart's first book, "Entertaining," the first-ever full color cookbook was published by Westport's Hostess Extraordinaire. More than a million copies of the book have sold. Stewart dedicated the book to her father for instilling in her a love for all things beautiful and to Alexis, her daughter, for her patience.

In 1987, Martha's work and life collided head-on. Her marriage was over. Andrew Stewart left Turkey Hill Farm. Six years later, Andy married Robin Fairclaw, once a flower consultant to Martha. Martha has said that, for years, she blamed herself for the divorce and she wondered, what did I do wrong? For Martha, the only answer was to keep on working. Writing more books. And, with Time Warner, she created a new magazine, Martha Stewart Living.

On the cover, Martha. Inside, more Martha. Martha was everywhere. The big question, would anyone want to buy that much Martha? The answer? A big yes. There were millions of people eager to live in Martha's world.

DIANE BRADY, "BUSINESSWEEK": She sort of hit as common nerve in a lot of people. A friend of mind calls it homemaker porn, essentially. It's aspiring to a life style you can't have. It's a fantasy world.

(END VIDEOTAPE)

ZAHN: And clearly hitting a different kind of vein with the jury today. That was Sharon Collins reporting.

You can join me for more about how Martha Stewart built her career Saturday on "PEOPLE IN THE NEWS." That will be on at 11:00 a.m. Eastern right here on CNN.

Meanwhile, Martha Stewart says she'll appeal. But why did the result take so many by surprise? We'll look at what went wrong for the defense.

And there may be plenty of jokes about it, but actually going to prison is not one of them. If the judge does end up sentencing her to a prison term, what will it be like to trade designer sheets for prison blues?

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP, "LARRY KING LIVE")

DONALD TRUMP, DEVELOPER/BUSINESSMAN: I'm devastated that Martha didn't testify. I would have said testify. When she said and her lawyer said, Martha Stewart is not going to testify, the whole jury went like this, as I read, and rightfully so. I wish I could have been there.

(END VIDEO CLIP)

ZAHN: Donald Trump has his ideas on whether Martha Stewart should have testified in her own defense. But what did go wrong, leading to today's verdict of guilty on all four counts.

Senior legal analyst Jeffrey Toobin is back. And from Aspen, Colorado, tonight, criminal defense attorney Mickey Sherman.

Welcome, both of you.

So, Mickey, do you think Martha Stewart should have taken the stand in her own defense?

MICKEY SHERMAN, CRIMINAL DEFENSE ATTORNEY: It's such an easy call after the fact. Only the attorney sitting in that seat, when the time comes, can really make that call. And it's just so easy to say, well, he should have done this, he should have done that.

In retrospect, sure, she should have done a lot of things, perhaps. But you can't judge that just simply by the verdict. And everything we know about this case and about Martha Stewart would have dictated and did dictate that she should not have taken the stand. The judge is ruling in her favor on all those phone calls. We know of her personality, which is supposed to be less than charming to a lot of people.

And there were a lot of questions which she would have had a very difficult time dealing with. So the decision was absolutely right. Maybe now, could you have second-guessed yourself? Absolutely.

ZAHN: Well, unfortunately, you know something about second- guessing. You lost a major high-profile trial in the Skakel case.

(CROSSTALK)

SHERMAN: Thanks for reminding me, Paula.

ZAHN: Well, yes, I know you live with that every day. I didn't mean that in a mean way.

But what do you think now, in retrospect, was the biggest mistake this team made?

SHERMAN: You don't know. You really don't know. Reading jurors are like tea leaves. And who is to say what the reaction would have been had she testified or whether or not they put on a more aggressive, affirmative case. You just can't go there. By the same token, just because they lost, doesn't mean they did something wrong. There are cases that are designed to be lost. When you have the might and the weight of the federal government against you, when it's United States of America versus Martha Stewart, those are overwhelming odds against you. Just when they just read the charges. And they have resources that are absolutely vast. And you've got agents and unlimited FBI people to work against you. You don't often win a federal case, period. Whether you're Martha Stewart or Frank Jones.

ZAHN: Yet, everything didn't go right for the prosecution team, Jeffrey.

TOOBIN: It didn't. Remember this is the judge who threw out the securities fraud count. As Mickey mentioned, some of the phone calls, very incriminating timed phone calls between Martha Stewart and Peter Bacanovic, the judge said, those are inadmissible because we don't know what was said. So, the judge gave the defense a lot of breaks in this case, which, by the way, I think means their appeal has no chance of success. So they had their chance. Their problem was the evidence. There's not much you can do about the evidence.

ZAHN: Let's quickly review what both sides had to say shortly after the verdict late this afternoon.

(BEGIN VIDEO CLIP)

DAVID KELLEY, U.S. ATTORNEY: If you are John Q. Citizen or Martha Stewart or Peter Bacanovic, we're going to go after you if you make these types of lies.

We do cases each and every day. We do large ones we do small ones.

ROBERT MORVILLO, DEFENSE ATTORNEY: We are confident that once we get our day in the court of appeals, the conviction will be reversed and Martha Stewart will ultimately be determined not to have done anything wrong.

(END VIDEO CLIP)

ZAHN: So Mickey, how tough is it to get a conviction overturned on an appeal?

SHERMAN: Unless you have some really great legal issues, it's near impossible. Appellate courts do not want to overturn the will of a jury, that's such an American democracy at work. That they just do not want to touch a jury verdict unless there's some real problems there. They've got a big uphill battle.

TOOBIN: Especially, when a judge like this one, gave the defense a lot of breaks. And a lot of rulings during the trial.

ZAHN: So you're saying, Mickey, no shot at all here?

SHERMAN: No. Definitely not. There's always a shot. You never know. You lose cases you're supposed to win and win cases you're supposed to lose. And who knows what the appellate court is supposed to do? I wouldn't rule it out totally, but I'd be spending a lot of time preparing her for her sentence right now.

ZAHN: Well, I've got to tell you, Mickey, you've got Jeffrey and me jealous that you're sitting in front of a fireplace in Colorado. Go take a break, relax. Thanks for joining us tonight, Mickey Sherman, Jeffrey Toobin. We'll be back in a little bit.

Coming up, designer goods and a multimedia empire built on a single name. What effect will the Martha Stewart conviction have on the Martha Stewart brand?

And not all prisons are created equal. If Martha Stewart does go to jail, what are the possibilities and what are some of the dangers?

(BEGIN VIDEO CLIP)

LARRY KING, HOST LARRY KING LIVE: How about dealing with joke, people on late night television who spare no one?

MARTHA STEWART, BUSINESSWOMAN: My buddies, you mean?

KING: The Lenos and the Lettermans and the Kimmels and the Conans.

STEWART: And again, it's their job.

(COMMERCIAL BREAK)

ZAHN: As you might expect, it was a roller coaster day for Martha Stewart's company. Shareholders of Martha Stewart Living Omnimedia acted on the rumors and pieces of information that came out of the courtroom. Shares of the company actually rose nearly 20 percent today at one point as many thought Stewart would be acquitted.

Trading was halted briefly during the verdict announcement, and when shareholder learned that Stewart was, in fact, found guilty, they dumped the stock.

Stewart's company closed down 23 percent, the largest percentage loss today on the New York stock exchange. Jen Rogers looks at how the company will try to recover.

(BEGIN VIDEOTAPE)

JEN ROGERS, CNN CORRESPONDENT (voice-over): Her company is called Martha Stewart Living Omnimedia. Now, following Friday's verdict, those first two words are synonymous with a convicted felon. That alone would be a huge hurdle to overcome, but the issue is not only the name, but that the brand is so intimately tied to Stewart herself. Her life style and her image.

Already, during the scandal, the company has struggled, cutting ad rates for "Martha Stewart Living" magazine and agreeing to reduce licensing fees for syndicated programs. Keeping advertisers will remain an uphill battle.

UNIDENTIFIED MALE: Martha Stewart's been found guilty of a crime. And advertisers are going to be unwilling to do business with the company for that reason.

ROGERS: Stewart relinquished her chairman and CEO title in June and no longer has day-to-day control of the company she founded. But she's still chief creative officer and a member of the board of directors. That board following the verdict announced it would meet promptly to evaluate the situation. And said, "we are confident that our assets are more than sufficient to continue MSO's development as a leading "how-to" brand building company."

Expectations are that the company will push ahead, but also distance itself from the domestic diva. One new initiative, a magazine called "Everyday Food" which does not feature Stewart.

While the verdict came down in court today, the jury is still out in the court of public opinion. The question remains, will consumers still embrace Martha Stewart as a product, despite what has happened to Martha Stewart, the person? Jen Rogers, CNN financial news, New York.

(END VIDEOTAPE)

ZAHN: More now on what Martha Stewart's company can do next. Jeff Sonnenfeld joins us from New Haven, Connecticut. He is the president and CEO of Yale's chief executive leadership institute. And Eric Dezenhall, president of Dezenhall resources. He joins us from our Washington bureau. He is an expert on pulling a company out of a crisis. Welcome.

So, Eric, is this a fatal blow to Martha Stewart's brand.

ERIC DEZENHALL, DEZENHALL RESOURCES: It's fatal as she knows her career to be today. It's entirely possible that five years from now, if she goes away for a while, no pun intended, she can come back with a smaller enterprise.

I think the problem with an icon like this is they tend to want to come back as big as they were before and people expect them to come back as big as they were before. But the real model here is to see whether or not you can do triage just like in the trauma room and save what can assets can be saved. That's not all of them.

ZAHN: So, Jeff, how would she ultimately rehabilitate her image now that she's a convicted felon?

JEFF SONNENFELD, YALE UNIVERSITY: Well, I think it's great that just before the break, you had Donald Trump, another eponymous name, same-named company individual. Donald Trump didn't do anything wrong or illegal, but he certainly did face financial distress. And he projects an image of success and had to bring all that back, and he's done a spectacular job.

You can look at Steve Madden. I disagree with Eric on this a little bit. Steve Madden, been running for the last almost 50 months out of a prison cell. His design company that has flourished in the period of time he's, quote unquote, been on sabbatical as the chief creative officer. In prison, they've gotten to 3,000 stores. They're in the toniest locations. People want to do business with him.

Michael Milken, a convicted felon. You find all kinds of world leaders, scientists, CEOs and clergy race out to his institute to work with him now. So, I think that an individual can recover the name.

The company is another issue. Some of our greatest iconic companies from Xerox to Boeing to International Paper have been filled with convicted felons and criminal acts and they've come back quite successfully. It's not easy, but you can do it.

ZAHN: So Eric, given what Jeff has just had to say, do you see a scenario where Kmart keeps Martha Stewart's face plastered over the packaging of their products that she's endorsed?

DEZENHALL: I really don't right away. I don't know of anybody as big as Martha Stewart who has been convicted of something so serious in such a hostile climate as today who has come back that way. There have been plenty of comebacks. Michael Milken came back but he also wasn't necessarily a brand and he had to go to prison for a long time, get cancer, and become a philanthropist and only 15 years later did he begin to recover.

I think Martha Stewart can come back to some of this, but she'll have to go away from the public eye. There's a tendency to think in these PR situations, these celebrities always want people to see more of them. If only people saw more of me, then this problem would be over. When sometimes the answer is people need to see less of you. She has to be willing to do that.

ZAHN: I think the one thing that came through in some of the jurors' comments today, Jeff, is just what an unsympathetic character she was to them. I wanted you to read between the lines here. When her company put out this statement earlier today, saying -- or actually yesterday, the company had, quote, "contingency plans in place in case Stewart was found guilty." What do you think those plans are?

SONNENFELD: Just between we close friends we actually had, in the last two few conferences back, we had Martha Stewart and Sharon Patrick, perhaps her last good day on earth, one or two days later, she was charged. And one of the that we were wrestling with, among all the CEOs that kept pushing her, that what if you're hit by a bus. This is being hit by a bus.

They were already -- there's great frustration in developing a succession plan. With Sharon Patrick planning to take over and trying to find alternative images. They had the "Everyday Eating" and the "Good Organizing" magazines in the works. They were taking things away from the image of Martha Stewart. They have a big governance problem here. They've got a tiny board, and it weighs down heavily on these people. You've had the succession issue. I think they can get through the succession issue with some of the governance concerns. You still have some of the gnawing injustice.

You know, when Eric says maybe a little time away. I don't agree. The flight or fight issue, they've got -- she's got to engage and stay part of the public profile and I think that she'll work her way out of this, possibly, if she stays at it. You have to show some contrition though. If Jimmy Swaggart and Bill Clinton and others when they finally shed the tear, the American public is enormously forgiving.

But I think you're right. The unsympathetic image makes you wonder, even as much as I admire Mr. Trump, I don't think she'd have been a great witness and they made the right call to not have her testify, though we do often second guess.

ZAHN: We'll leave it there. Jeff Sonnenfeld, Eric Dezenhall, thank you. Appreciate it.

Prison walls are a distinct possibility for Martha Stewart. Could she escape the fate of a jail cell? And what is typical punishment for a white collar criminal?

And Martha Stewart's style. It made her millions. In fact, billions on paper. It also produced millions of laughs for comedians. An American icon tumbles.

(COMMERCIAL BREAK)

ZAHN: "LARRY KING LIVE" straight ahead with another hour on the Martha Stewart verdict. His guests include Stewart's friend, Dominick Dunne, who also covered the trial. And we continue now with our Stewart coverage. What does her future look like?

She faces sentencing on June 17. Each of the counts carries a maximum five-year prison sentence. There's a chance though that she may just pay a hefty fine and not spend a day in prison. Joining us, legal analyst Jeffrey Toobin is back. And someone who has written extensively on prisons for white-collar criminals, not that she's been in one, but has observed what goes on there. Penelope Patsuris from Forbes.com. First, Jeffrey, will Martha Stewart end up in prison when June 17 comes around?

TOOBIN: Almost absolutely sure. There's a slight chance she can avoid prison, but it's far more likely after being convicted of all counts that she's looking on something in the order of 12-18 months, 18-24 months which in the federal system means you serve at least 85 percent of what you get. She's going to prison.

ZAHN: Where could she end up?

PENELOPE PATSURIS, FORBES.COM: I think she's probably going to end up in the Danbarry (ph) Minimum Security Federal Prison Camp...

ZAHN: In Connecticut. Not far from her home.

PATSURIS: Not far from her home. That's probably because sentencing judges do like to put prisoners nearby their family so that they can have visits. And it's the only facility in the northeast that houses -- minimum security facility in the northeast that houses women.

ZAHN: Can she make a request where she wants to go?

PATSURIS: She can. Doesn't mean it's going to be successful. Sam Waksal wisely asked for Eglin, the camp for which the term "Club Fed" was coined.

ZAHN: And they gave it to him?

PATSURIS: No, he didn't get it. It doesn't hurt to ask. They do listen. They do listen.

ZAHN: Let's talk about what prison life might be like for Martha, depending upon where she ends up. Tell us about the rules that she would have to follow and what she's up against.

PATSURIS: Well, there is a very important unwritten code that I've been told about by an ex-con who served for insurance fraud, and you have about a month to pick up on it. It's pretty straightforward. Don't rat out your fellow prisoners, don't cut in line. Don't reach across the dinner table. Don't ask personal questions, and that's about it.

ZAHN: Will her celebrity help or hurt her?

PATSURIS: I think that's going to be really interesting to find out. She could definitely be a focus of a lot of resentment for obvious reasons, very wealthy and so forth. But then, I wonder. I do wonder if these women serving time who don't have a lot else going on might just be fascinated with her and might really look to her for a little guidance and information. I mean, not that they're all going to sit around decorating their cells, but I do wonder if they'll be starstruck or resentful.

ZAHN: It's interesting, because what I've gleaned from -- what little we've heard from the jurors so far, there was so little empathy for this woman. The jurors couldn't relate to her. Someone was saying -- I heard a female judge saying tonight, I don't know where her advisers were. I don't know who allowed her to walk into the courtroom with a $12,000 handbag. There was nothing about her appearance that related to jury members. You're sitting at home tonight, you're Martha Stewart, you're kicking yourself saying what?

TOOBIN: You are saying so many things. This is such an avoidable crime. The stupid lie that she told.

ZAHN: You're saying this was a voluntary crime?

TOOBIN: This wasn't about greed. She didn't make millions of dollars. This wasn't about lust. This was just stupidity and arrogance. She could have said nothing. This is a crime -- she wasn't charged with insider trading. If she'd simply said nothing, taken the Fifth, taken the embarrassment that went with that, she'd be home -- a free woman tonight. Or if she'd simply told the truth and said, well, you know, maybe I made a mistake, I'll give the money back. This case is over and forgotten. She made every wrong decision. I mean, I don't even care about her, and it drives me crazy. Imagine how it must drive her.

ZAHN: I still don't understand why she talked to the SEC. Did the attorney say talk? I know she didn't want to face the embarrassment of the public image that might have been damaged by looking like she was avoiding questions...

TOOBIN: I think that's a big part of it. And also, this is a woman who has been a winner a long time. She's a professional communicator. Remember she said that to me when I interviewed her. You know, I'm a professional communicator. She thought those skills could translate to a room when you're being cross-examined by a government lawyer. Didn't work.

ZAHN: Jeffrey Toobin, Penelope Patsuris, thank you.

Love her or hate her, Martha Stewart made her mark. What's it like to be a target at the top? The humbling of Martha Stewart next.

(BEGIN VIDEO CLIP)

STEWART: I think that fame sometimes leads to problems. And I mean, when I was a youngster, I noticed that it happened to James Dean, my hero. It happened to Elvis Presley, my hero. Why? Why? Why didn't anybody take care of them? I mean, those are famous people. I don't consider myself in that league whatsoever, Larry.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

JAY LENO, HOST, TONIGHT SHOW: I love this. In their closing arguments, lawyers for Martha Stewart told the jurors that she's way too smart to commit the crime she's charged with. That will get the jury on your side. Unlike you idiots who are too stupid to get out of jury duty, my client is a multimillion dollar genius.

(END VIDEO CLIP)

ZAHN: Well, Jay Leno isn't the only one who has targeted Martha Stewart's image and reputation could spoil more with her conviction. Joining us now to discuss the fall of an American icon is John Small, editor of SaveMartha.com, Andrea Peyser, who has written about Stewart now for "The New York Post" for quite some time, and once again, legal analyst Jeffrey Toobin. Welcome back.

So, John, you still believe she's innocent after today?

JOHN SMALL, SAVEMARTHA.COM: I believe that Martha got a raw deal. This was a tempest in a cuisinart, and the cuisinart exploded today. And the collateral damage was extensive. We're talking over $1 billion in lost value of her company. I heard that this investigation cost $40 million. I don't know if that's true. But whatever it cost was way too much in proportion to what she did.

ZAHN: So she's lost no credibility in your eyes based on the verdict today?

SMALL: Martha's fans will stand behind her. Now, this has implications for her stock. We know that. But on my site we have been taking polls of this. And 20 percent of the users, of the viewers, say they will actually buy more of Martha's products, not less.

ZAHN: What does your cup say that you brought in tonight?

SMALL: Well, we have a "Save Martha" cup that said, "if her stock sale is legit, you must acquit." Obviously, the jurors didn't get that message.

ZAHN: And you saw what happened to that stock price today, the single largest drop of any stop on the exchange -- or stock on the exchange today. Andrea, you have been convinced of her guilt for some time. You've written extensively about it. Do you feel vindicated now?

ANDREA PEYSER, NEW YORK POST: Well, yeah. I mean, it was a bit lonely there for a while, because I sometimes felt like I was in an alternate reality, because here is one piece of evidence after another after another that these people committed this crime. It's a crime. And we're hearing, oh, well, people do worse things and people are much more worse hoodlums and they defraud more people and they steal more money. And that is an excuse. They were guilty. It was so obvious to me from the beginning, and the jury, believe it or not, came in and they saw exactly what I saw.

ZAHN: What about the opinion I've heard expressed a couple of times today, that this wouldn't have happened if she'd been a man. That she was treated that way because she, first of all, she had no empathy from anybody that worked with her, but more importantly, juries aren't used to dealing with powerful women.

PEYSER: I have been insulted by this from day one. On the one hand, she's this powerful, smart, intelligent woman. On the other hand, she doesn't want to take responsibility. She's not accountable when she does something wrong, which way is it? Are you...

ZAHN: It's the victimization trap.

PEYSER: It's ridiculous. I think it was a tactic that backfired big time, and I didn't buy it.

ZAHN: On a personal level -- I mean, you must have been relieved because you've written so negatively about it. But was there a part of you that wanted to see her go down because she had this arrogant image in public?

PEYSER: Well, arrogance is part of her undoing. But it's arrogance in the fact that she will not take responsibility for her actions. Then, it's, you know, she can do the crime, but then it's like, well, you're out to get me. Well, did you do it or did you not? Well, yes, I did, and you're out to get me. Which way do you want it?

TOOBIN: Well, even today, even today after the verdict, this stupidity with her Web site that at first she says I've done nothing wrong. Then she takes away that I've done nothing wrong. I mean, you know...

ZAHN: And you say that there's a legal reason for her removing that from her Web site.

TOOBIN: That's right. But there's no sincerity involved here. This is just the lawyer saying no, you can't, you can't say I've done nothing wrong, because that means you might not get the two points off under the federal sentencing guidelines for acceptance of responsibility. There's no sincerity here.

Even at this point, what difference does it make what she says, because her credibility is so tarnished. And Andrea, you know, I sat with Andrea in court every day. And you know, she was known as the toughest on Martha. But you know, compared to the jurors, Andrea was a pussycat.

ZAHN: Do you feel like mincemeat tonight, John?

SMALL: Oh, my God, we're getting beat to a pulp.

ZAHN: It's a lonely place you're standing in.

SMALL: I mean, this is...

TOOBIN: That's what happens when you're convicted on all counts.

SMALL: It's actually -- it's actually not so lonely. We've had over 30 million hits on SaveMartha.com. Over 100,000 e-mails sent to John Ashcroft, sent to advertisers, sent to CBS, because we want them to put Martha back on in the morning, not at 2:00 at night.

ZAHN: OK, and simply put, you've always viewed this from day one as nothing more than a witch hunt?

SMALL: It's a tempest in a cuisinart. What kind of country is it where O.J. Simpson goes free for murdering his wife, and Martha Stewart is convicted of lying about a crime she didn't commit?

ZAHN: Oh, no, (UNINTELLIGIBLE). Criminal trial, criminal trial, we don't have time to go there.

Andrea, final thought on what you think Martha Stewart faces now, besides spending some time in prison.

PEYSER: Well, she's going to spend some time in prison, and I hope she thinks about it. I hope that she will get out there and admit that she did something wrong. Then, maybe I'll buy a Martha Stewart mug or something if this woman can admit it.

ZAHN: You say there's a fat chance of that happening. TOOBIN: No chance. You know, "Martha Stewart Living" is a wonderful magazine. Her products at K-Mart are terrific. But -- and it's for the stupidity, she threw it all away.

ZAHN: Jeffrey Toobin, Andrea Peyser, John Small, thank you all for joining us tonight.

SMALL: Save Martha.

ZAHN: Appreciate your all being with us. Have a great weekend. We'll be back same time, same place, on Monday night. "LARRY KING LIVE" is next.

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