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The looming charges continued to weigh on shares of her company, Martha Stewart Living Omnimedia (MSO: news, chart, profile) on Wednesday.

The stock fell 29 cents to $9.23 in early action on the New York Stock Exchange.

As the company held its annual shareholder meeting on Tuesday, the government's year-old investigation of the homemaking megastar's 2001 sale of ImClone Systems shares appeared to be on the verge of resulting in an indictment.

If indicted, Stewart plans to plead not guilty and "proceed to trial," said her lawyer, Robert Morvillo.

Stewart was a no-show at the annual meeting of Martha Stewart Living Omnimedia, but board member Arthur Martinez, the former Sears chief executive, emerged from the session to deny a broadcast report that she had resigned her stewardship of the company.

"Martha Stewart remains CEO of Martha Stewart Living Omnimedia," Martinez said.

The cable channel CNBC reported that Martinez could be named to head the company on an interim basis if the resignation does come to pass. Citing unnamed sources, the channel reported Stewart, who is facing both criminal and civil charges, was expected to step down as chairwoman and chief executive, but she would remain on the board.

Martinez called the report "categorically untrue."

Shareholders emerging from the meeting said Stewart, in a videotaped message, had expressed her regret for not attending the New York gathering.

Early Tuesday, the company had revealed its expectation that the U.S. attorney's office for the Southern District of New York would ask a grand jury to return "an indictment against her in the near future."

Additionally, the company said, the Securities and Exchange Commission is expected to file a civil complaint against Stewart.

According to Stewart's employment agreement, the company can terminate the executive for "cause" if she's convicted of a felony or willful gross misconduct, which in either case results in material and demonstrable damage to the company's business or reputation.

Stewart probe

Federal prosecutors have been investigating Stewart for allegedly receiving insider information that prompted her to sell shares of ImClone Systems (IMCLE: news, chart, profile) on Dec. 27, 2001, a day before it was announced that regulators had rejected a key cancer-drug application by the company and its partners.

Martha Stewart Omnimedia "and its board of directors have been planning for a number of possible contingencies, are evaluating the current situation and will take action as appropriate," said the company, which went public in October 1999.

The company did not say what the charges against Stewart might be.

A source told CBS MarketWatch that Stewart could be indicted Wednesday on charges of making false statements.

Officials at the SEC declined to comment, as did the U.S. attorney's office. A spokeswoman for Stewart also chose not to comment.

Shareholders supportive

At the shareholder meeting, several investors threw their support behind the domesticity diva.

Julie Sawka of Windsor, Conn., said she hopes Stewart stays with the company, but she said she'd probably sell her stock if Stewart leaves the firm. "I think she got a raw deal," said Sawka. "I would have sold [ImClone] myself."

Shareholder Dorothy Schaeffer, who lives near one of Stewart's residences, said that Stewart has been "much maligned" in the ImClone stock scandal.

"I don't think she deserves this," Schaeffer said. "Who did she hurt but herself?"

Peter Sugleris carried a picture of himself with Stewart. "If she leaves, I may sell some [shares]," he said. "Good luck, Martha. We all love you."

Bob Donnelly credited Stewart with creating a new way of marketing. "She is the company," he said. "I'm going to hang in there with my position."

The Waksal link

Sam Waksal, the former head of ImClone who pleaded guilty in October to trying to sell ImClone shares on Dec. 27, 2001, and lying to the Securities and Exchange Commission, is a friend of Stewart's. Waksal's sentencing has been set for June 10.

Stewart sold about 4,000 shares of ImClone a day before news broke that the FDA would reject ImClone's application for the anti-cancer drug Erbitux. Stewart has repeatedly denied any wrongdoing in the share sale. She says she had a stop-loss order with her Merrill Lynch broker, Peter Bacanovic, to sell her ImClone shares if they fell below $60.

Erbitux, the ImClone drug at the center of the scandal, has recently enjoyed a reversal of fortunes. See Biotech Report.

"Prosecutors are getting ready to pull the trigger," said attorney Robert Mintz. "This would likely to be a double-barreled approach that will include both insider trading and the allegations of a subsequent cover-up."

Stewart is potentially facing charges of insider trading, obstruction of justice and lying to prosecutors, Mintz said.

"One of the elements the [Justice Department] has to prove for insider trading is knowledge," he said. "What better way to prove knowledge than the subsequent effort to cover up the crime?"

Last year, Stewart received a salary of $900,000, plus a bonus of $680,600.

Richard Strassberg, the attorney for Stewart stockbroker Bacanovic, could not be reached for comment.

Ramifications of indictment

A Stewart indictment might not prove tragic for the eponymous company. Steve Madden, founder of the youth-oriented shoe company that bears his name, was handed a 41-month sentence for stock fraud in April 2002.

Shares of Steve Madden Ltd. had dropped below $6 when the investigation was announced in 2000. But the stock has rebounded to trade near $20. Steve Madden (SHOO: news, chart, profile) shares gained 32 cents to close at $19.50 Tuesday.

Analyst Alissa Goldwasser of William Blair & Co. wrote in a research note that a best-case scenario -- that the ImClone investigation could conclude without formal charges lodged against Stewart -- is apparently no longer a possible outcome.

Goldwasser said the deterioration of Martha Stewart Living Omnimedia's business is of greater concern than would be all but the direst results of the Stewart investigation.

"We believe that the sooner Ms. Stewart's legal situation is resolved, the sooner the company can take definitive action to address the company's declining magazine advertising and circulation revenue, money-losing direct commerce division, and compromised merchandising business," she said.

Neither Goldwasser nor William Blair owns shares of the company, nor does the firm have an investment-banking relationship with Martha Stewart Living Omnimedia, a spokesman said.

But analyst Andrew Rittenberry of Gabelli & Co. said the company has susbtantial assets and added that the stock could be trading in the "midteens."

"The real wild card is what happens with Martha Stewart in the [legal] case," said Rittenberry, indicating that many people on Wall Street hadn't yet reached a conclusion on Stewart's guilt or innocence.

"The question is what kind of damage will be done to the business," he said.