may invoke national security defense
By David Voreacos, Bloomberg
Saturday, January 21, 2006
Joseph Nacchio, former chief executive officer of Qwest
Communications International Inc., may invoke a
government-secrets law normally used at terrorism and
espionage trials to fight his insider-trading case, records
Prosecutors accused Nacchio on Dec. 20 of selling $101
million in Qwest stock in 2001 while knowing revenue targets
were inflated. Defense lawyer Herbert Stern told a judge
that day that his defense may hinge on what Nacchio knew
about Qwest's confidential "business relations" with the
Stern and prosecutors filed sealed court papers this week
under the Classified Information Procedures Act (CIPA),
which governs use of classified data at trials. Invoking the
law in an insider trading case is rare and may prompt
prosecutors to drop charges rather than let government
secrets emerge at trial.
"Is it unusual? Yes," said John Vandevelde, a Los Angeles
lawyer who defended an FBI informant once suspected of being
a Chinese double agent. "Is it unreasonable or
far-fetched? I think not. There may be all kinds of
classified information in all kinds of cases that we may not
have anticipated in earlier eras that defendants may be
entitled to." Stern's CIPA filing may be discussed today at
a pre-trial hearing before U.S. District Judge Edward
Nottingham in Denver.
Nacchio, 56, was the CEO at Qwest, the No. 4 local U.S.
telephone company, from 1997 until his ouster in June 2002.
He denies wrongdoing and is free on $2 million bail.
Nacchio is accused of knowing that Qwest was struggling to
meet aggressive financial targets when he sold shares. He
was not accused of any role in accounting manipulations that
led Qwest to erase $2.5 billion in revenue. He faces a
civil lawsuit by the Securities and Exchange Commission that
accuses him of directing an accounting fraud.
Stern, a retired federal judge, told Nottingham on Dec. 20
that the case was not simply a matter of "whether the
projections that were given were accurate or not or whether
he understood them to be different." Rather, he said,
Nacchio's knowledge of Qwest's income from the government is
"at the core of this indictment." Stern said he needs a
U.S. security clearance to talk to Nacchio about the secret
Nacchio played key roles in two industry panels that advised
the U.S. government on national security issues. He was
vice chairman of the National Security Telecommunications
Advisory Committee, which made recommendations on protecting
the nation's communications network.
He also was chairman of the Network Reliability and
Interoperability Council, which helped protect the nation's
infrastructure "with a strong emphasis on national
security," said a news release announcing his appointment in
The CIPA was passed in 1980 and spells out how to introduce
government secrets at trial. The law was used in
proceedings involving Zacarias Moussaoui, who pleaded guilty
to conspiracy charges linked to the Sept. 11, 2001,
It was also used in by Wen Ho Lee, a former weapons designer
once accused of spying for China, and Katrina Leung, a
former FBI informant accused of espionage. Lee pleaded
guilty to mishandling government information. Leung's
charges were tossed out by a judge. She pleaded guilty to
lesser charges last year.
Under the CIPA, defense lawyers, prosecutors and court
workers need government security clearances to review secret
material. Judges weigh its relevance and admissibility.
The Department of Justice appoints a "court security
officer" to oversee handling and storing of documents in a
"There's probably a decent argument that Mr. Nacchio ought
to at least get access to the information and show that it's
relevant," said Vandevelde, Leung's attorney.
If a judge rules that secret evidence is admissible, the
U.S. attorney general can order the judge to keep it under
seal for national security reasons, said Andrew McCarthy, a
former federal prosecutor. He won a conviction of Sheik
Omar Abdel Rahman in 1995 for plotting to blow up the United
Nations, an FBI building, two tunnels, and a bridge in New
Prosecutors know that ordering classified information to
stay under seal could prompt a judge to drop charges or an
entire indictment, said McCarthy, a senior fellow at the
Foundation for the Defense of Democracy, a counter-terrorism
"You have a vigorous litigation so the issues get sharpened
and everybody understands what the stakes are," McCarthy
"The defendant is forced to prove how important the
information is to its case, and the government is forced to
consider carefully how important it is to keep the
"The government knows the bottom line is they can stop the
judge from declassifying information, but the price of
hewing to that position could be that the court is going to
dismiss counts or the entire indictment," he said.
Most of Qwest's revenue comes from the local-phone business
of U S West, which Nacchio bought in 2000 for $44 billion
using Qwest's soaring stock price. The SEC alleged that
Nacchio and other former Qwest executives inflated company
shares to pay for U S West.
Qwest agreed in November to pay $400 million to settle some
of the shareholder lawsuits it faced. The company also
agreed to pay $250 million to settle SEC fraud allegations.
Shares of Qwest rose 3 cents to $5.92 at 10:05 a.m. in New
York Stock Exchange composite trading. They have risen
almost 5 percent this year.