could point to board's actions
By Andy Vuong, Staff Writer
Sunday, January 8, 2006
Qwest chief executive Joe Nacchio -- accused of criminal
insider trading for selling $100.8 million worth of Qwest
stock in 2001 -- may have a simple yet powerful defense for
the sales: The board made him do it.
Qwest publicly stated on several occasions between September
2000 and February 2001 that its board of directors had
ordered Nacchio to unload millions' worth of company shares.
Legal experts say the board's actions and company statements
at the time could be vital to Nacchio's defense.
"He would argue that what he was doing was with full
knowledge and authorization of the board," said Douglas
McNabb, senior principal of McNabb Associates, a Washington,
D.C.-based criminal defense law firm not involved in the
Nacchio case. "That's huge."
Federal prosecutors are expected to argue that even if
Nacchio was told to unload Qwest stock, the 42 stock sales
he made between January and May 2001 were illegal because he
was aware of key information about the company's financial
condition that wasn't publicly available.
They likely will also assert that Nacchio accelerated his
stock sales instead of following the board's order to
systematically divest his position. To obtain a conviction,
prosecutors would have to convince a jury beyond a
reasonable doubt that Nacchio dumped stock while he knew
Qwest's financial condition was much weaker than he claimed
Nacchio, of Mendham, N.J., has pleaded not guilty. A
discovery hearing -- where the prosecution and defense may
disclose to each other additional details about their cases
-- is scheduled for Jan. 20.
The stakes are high for both sides as the case unfolds.
For the Justice Department, the Nacchio prosecution is the
culmination of a sweeping probe of Qwest that has spanned
If convicted, Nacchio faces up to 10 years in prison and a
$1 million fine on each of the 42 counts against him. The
government is also seeking the $100.8 million Nacchio
grossed on the stock sales -- plus other fines.
The dollar amount and number of counts against Nacchio make
it one of the single largest criminal insider-trading cases.
Federal prosecutors and Nacchio's defense attorneys declined
comment for this story.
Nacchio stopped selling
In August 2000, after Qwest had acquired Denver-based Baby
Bell US West, Nacchio exercised 550,000 stock options at
$5.50 apiece and sold the shares at prices ranging from
$49.05 to $53.34.
In September 2000, when those sales were disclosed publicly,
a company spokesman said that the Qwest board had directed
Nacchio to sell some of his shares every quarter because it
didn't want his ownership stake to get too large.
"Joe has no choice -- he is required to sell a portion of
his position," Tyler Gronbach, Qwest's spokesman at the
time, said in a Denver Post article on Sept. 15, 2000.
Nacchio held 18 million stock options throughout 2000.
Gronbach, who left Qwest last October to work for R.H.
Donnelley Corp. in Cary, N.C., did not return calls for
The Denver Post last week asked Qwest for minutes of board
meetings that would shed light on Nacchio's stock sales.
The company declined but gave this statement: "We continue
in our efforts to cooperate with the government in
connection with the investigation."
In February 2001, the company issued a news release
announcing a program in which Nacchio would systematically
sell 6.1 million shares over the next 28 months at the
Under the program, Nacchio was to exercise and sell 11,500
stock options daily from Feb. 20, 2001, to June 30, 2003,
the date when the stock options would have expired. He was
to sell the stock regardless of its price.
"The Qwest board asked Nacchio to commit to the program to
avoid the bunching of sales during and at the end of the
exercise period," according to the Feb. 16, 2001, news
Experts say such programs are a common way for insiders to
sell stock systematically without raising concerns on Wall
Street and among the investing public.
On eight trading days, Nacchio exercised 11,500 stock
options each day at a price of $5.50 apiece and sold those
shares at a price ranging from $34.84 to $38.12. However,
he scrapped the sales program two weeks after it was
announced -- reportedly because Qwest's stock was slipping
"I will not continue to sell shares daily at these prices
given the current uncertainty in the markets," Nacchio said
in a statement on March 2, 2001.
Nacchio's statements and actions in this period are
Between Jan. 2, 2001, and May 29, 2001, the government
alleges, Nacchio committed illegal insider trading by
selling more than 2.5 million Qwest shares for $100.8
million while he knew the company's financial condition was
weaker than disclosed.
Insiders at public companies -- such as Nacchio at Qwest
during that time -- are required to sign Securities and
Exchange Commission disclosures that they knew of no
"material adverse information" about the company when
Nacchio was forced out of Qwest in June 2002 as the
company's deteriorating financial condition became known.
Qwest stock traded as low as $1.11 in August 2002. It was
later forced to restate $2.5 billion in revenues.
What he knew is critical
The board's mandate to Nacchio to sell shares is "a good
fact for the defense," said Jay Brown, a former Securities
and Exchange attorney and law professor at the University of
Brown added that Nacchio can still be convicted for insider
trading on stock sales made under the board's mandate if he
had knowledge of material, nonpublic information at the
"Certainly the defense would use any information that tends
to negate Nacchio's intent to commit any wrongful activity,"
said Eric Yaffe, a former federal prosecutor now in private
practice with Gray Plant Mooty in Washington, D.C.
"But the question is, are there other issues or factors and
other evidence of which the government is aware of" that
would counteract the information, Yaffe said.
Former Qwest chief financial officer Robin Szeliga has
pleaded guilty to one count of illegal insider trading and
agreed to help with the prosecution's case against Nacchio.
The government charged Szeliga with illegal insider trading
for an April 30, 2001, stock sale in which she sold 10,000
Qwest shares at $41 a share. On the same day, Nacchio sold
110,000 shares for $41.12, a transaction cited in his
Last month, former Qwest executive vice president Marc
Weisberg reached a plea deal on one charge of wire fraud and
agreed to cooperate with prosecutors.
Former Qwest president Afshin Mohebbi also may testify for
In October 2004, Qwest agreed to pay $250 million to settle
SEC charges alleging financial fraud. In November 2005, the
company agreed to pay $400 million to settle a class-action
No past or present Qwest board member has been charged as
part of the federal government's probe into Qwest.
Several former board members who served during Nacchio's
tenure didn't return calls seeking comment.
Staff writer Andy Vuong
can be reached at 303-820-1209 or