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Warnings in writing
Qwest exec alerted Nacchio to revenue 'problems' before '01
By Jeff Smith, Rocky Mountain News
Tuesday, January 24, 2006

Qwest's president warned then-CEO Joe Nacchio by January 2001 about the "big problems" the Denver telco faced if it couldn't "crank up" its business, according to court documents unsealed Monday.  Former President and Chief Operating Officer Afshin Mohebbi made the warning in writing to Nacchio and then reflected on what he told Nacchio in person around that time in an e-mail to finance executive Robin Szeliga.

"I told him we have done a great job of doing the one-time things and that cannot continue," Mohebbi wrote to Szeliga on Jan. 2, 2001.  "We need the recurring to take off big time by the end of first quarter or we are screwed."

Recurring refers to revenue that is ongoing from quarter to quarter, such as the company's local telephone business, in contrast to one-time sales of fiber-optic capacity or equipment.

Nacchio faces 42 insider-trading charges in connection with selling more than $100 million of Qwest stock in the first five months of 2001.  He has pleaded not guilty.

The documents filed in U.S. District Court in Colorado are possibly some of the strongest pieces of evidence that Nacchio was told by early 2001 that Qwest's business was struggling.

The documents also indicate there were more specific discussions with Nacchio on Jan. 3, 2001, and confirm Mohebbi likely will be a key prosecution witness in the government's insider-trading case against Nacchio.

Of course, Nacchio could have a different recollection of his communications with Mohebbi, and the significance of the information likely will be countered by Nacchio's defense team if the case goes to trial.

Nacchio's lead attorney, Herbert Stern, didn't return a call for comment.

Prosecutors allege Nacchio accelerated his stock sales while in possession of "material" information about how the company was relying on questionable one-time deals to fill significant gaps in its revenue targets.

The magnitude of those deals wasn't disclosed to investors until analysts grew increasingly skeptical of the company's numbers in the summer of 2001.

Qwest was still reporting double-digit revenue growth during its first two quarters of 2001 while other telecommunications companies across the country were weakening.  The telco eventually erased $2.5 billion of revenue from its 2000 and 2001 books.

Nacchio has indicated he wants to use a government-secrets defense, arguing he was optimistic about Qwest's financial condition and prospects because of classified information he possessed.  Nacchio was privvy to government secrets while serving on two top federal telecommunications advisory panels.

The Mohebbi correspondence was included in recent court filings in which U.S. Attorney for Colorado William Leone argued classified information is "wholly irrelevant" to the case because only about 1.5 percent of Qwest's revenues resulted from federal contracts and classified contracts were only a "small subset" of that number.

Furthermore, prosecutors argued all federal contracts -- whether classified or unclassified -- were included in Qwest's forecasts, with classified projects protected by code names such as Ferrari.

The government unit, "like almost every other Qwest business unit, was performing worse than expected, falling short of its plan by as much as $18 million for 2001" at the time Nacchio was selling the stock, prosecutors allege.

Even if Qwest had significant prospects for getting classified government work, "the defendant would still be under a duty to disclose or abstain (from selling stock)," prosecutors added.

Nacchio's defense team said in an unsealed court filing that Nacchio's state of mind will be a "critical aspect" of the case.

"Mr. Nacchio, because of his participation in some of the highest councils of government, was aware not just of secret government contracts which had already been awarded to Qwest, but also of well-formed plans for the government's future business dealings with the company."

His attorneys also argue the government must prove Qwest's financial figures were deliberately false.  The government maintains it doesn't have to prove accounting fraud to make the insider-trading claims stick.

The government has started the process to provide preliminary national security clearance to some of Nacchio's attorneys so they can debrief Nacchio.

But prosecutors argue a "full-blown" use of the so-called Classified Information Procedures Act is unnecessary because "the government does not believe that it will ever be necessary to refer to classified information during the course of this case."

Legal experts say the government-secrets strategy could be effective in giving Nacchio grounds for appeal if he is convicted and the jury wasn't allowed to hear certain evidence.

Steps to obtain preliminary national security clearance include completing a security questionnaire and two fingerprint cards, and undergoing a background check by the FBI.

If Nacchio's defense attorneys clear those hurdles, they would receive a security briefing and space to work within a secure facility in Denver.

Sounding the alarm

  Afshin Mohebbi's memorandum to Joe Nacchio (sometime before Jan. 2, 2001):  Mohebbi expressed concerns about Qwest's ability to meet revenue projections of $5.1 billion for the firstquarter of 2001, saying the telco would need to book $580 million of one-time deals.  "It's doable but if we don't crank up recurring(ongoing revenue) growth by April, we got big problems."

  Mohebbi's e-mail on Jan. 2, 2001, to finance executive Robin Szeliga: "Remember the discussion I had with Joe. . . .We need the recurring (revenues) to take off big time by the end of first quarter or we are screwed."

http://rockymountainnews.com/drmn/tech/article/0,2777,DRMN_23910_4410478,00.html
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