September 23, 2002 12:00 PM

August. East Hampton. A swanky horse show. A sea of linen and straw hats. Sounds like an event made for Martha Stewart, right? “She always comes to the Hampton Classic,” says one longtime friend. “But this year, she wasn’t anywhere near it.”

Indeed, it has been an unusually low-key and generally lousy summer for Stewart, 61, whose carefully nurtured image is deflating faster than a botched soufflé. Since her stock-trading scandal broke on June 6, “Martha has put herself under house arrest,” says her friend Hamptons columnist R. Couri Hay. “When she steps out, she gets slammed. She knows everybody smells blood.”

Certainly the legal authorities are hot on her trail—and might even want to put her behind bars. The Justice Department and the SEC are investigating whether the diva of all things domestic dumped $227,824 worth of ImClone stock last December after getting an illegal inside tip. Last week Congress asked the Justice Department to look into whether Stewart knowingly lied to the House Committee investigating the sale of her ImClone stock. “We gave her every opportunity to put her best foot forward,” says House Energy and Commerce Committee spokesman Ken Johnson. “If she had come forward and shot straight with us, this would have been over the next day.”

Stewart has been similarly AWOL from the social scene (see box). For much of July she lay low in tony Westport, Conn., where she tapes her TV show and has a two-story Colonial home. Neighbors spotted her taking early-morning strolls on the beach with her two chows. “If this weren’t Martha Stewart, you wouldn’t hear anything about it,” insists another friend, ad executive Jerry Della Femina. “She’s done nothing wrong.”

Maybe, but stockholders in Martha Stewart Living Omnimedia are suing her for damaging the company’s biggest asset—her image—while charges of making false statements to Congress could land her as much as five years in jail.

Martha Stewart in prison? Where the sheets are 180-thread count, at best? “She realizes the serious ramifications of all this,” says Hay. “She is not just breezing through this fluffing pillows and blithely cutting her roses. This is her worst nightmare.”

Alex Tresniowski

Diane Herbst in Westport, Sharon Cotliar, Diane Clehane and Liza Hamm in New York, Anne Driscoll in Maine and Linda Kramer in Washington, D.C.

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