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Ex-Qwest CEO Nacchio Seeks Dismissal of Trading Charges
By Shawn Young
The Wall Street Journal
Friday, February 10, 2006

Former Qwest Communications International Inc. Chief Executive Joseph Nacchio asked a judge to dismiss the insider trading charges against him, claiming the prosecution's case is so vague and erroneous that it shouldn't be allowed to proceed.

In a filing with the U.S. district Court in Denver late on Friday, Mr. Nacchio's attorney Herbert Stern blasted U.S. Attorney William Leone's case against Mr. Nacchio as "confused, confusing and internally inconsistent."  The filing says the government "had no case at all."

Mr. Nacchio was indicted in December on 42 counts of insider trading after a government investigation that lasted more than three years.  Each count carries a potential penalty of 10 years in jail.  The government also seeks $101 million in penalties, reflecting the face value of the stock Mr. Nacchio sold in 2001, while he allegedly knew the Denver-based phone company wasn't doing as well as he claimed publicly.

Qwest, a Wall Street stock darling during the late 1990s ultimately restated $2.5 billion in revenue and $2.2 billion in earnings for 2000 and for 2001, the year the accounting problems began coming to light.  Mr. Nacchio was forced out of his post in 2002 amidst the mounting accounting scandal.

Mr. Nacchio was allegedly warned by former Qwest President Afshin Mohebbi, who is expected to be an important prosecution witness, that Qwest's financial projections were "a huge stretch" and the company would be in trouble if its key sources of revenue didn't improve.  He allegedly was aware that the company was meeting its financial targets only through unsustainable one-time sales and aggressive accounting.

Neither Mr. Nacchio nor any other former Qwest executive faces criminal charges of falsifying the company's books, though Messrs. Nacchio and Mohebbi, along with other former executives, face civil fraud charges from the Securities and Exchange Commission.

In its filing, which was intended to deal with flaws in the indictment, the defense claims the prosecution makes claims that are so vague they don't identify a crime.

"It is not alleged that Mr. Nacchio knew Qwest could not make its numbers, or even that he believed Qwest would not make its numbers, but merely that he had been told that Qwest might not be able to make its numbers," the defense filing says.

The defense also says that the company was meeting financial targets at the time, and the government fails to claim that there was anything amiss in Qwest's financial reporting or its disclosures to investors.  Any information Mr. Nacchio allegedly had about Qwest's troubles, therefore, was not material and would not have barred him from selling his stock, the filing says.

The defense also says the prosecution erred in asking for a penalty that reflected the full face value of the stock Mr. Nacchio sold because the figure does not take into account what Mr. Nacchio paid for the shares and thus overstates the proceeds of the sales.  The filing does not say how much profit Mr. Nacchio made from the sales.

A spokesman for Mr. Leone's office declined to comment on the defense filing.

Although the filing didn't address this aspect of Mr. Nacchio's case, the former chief executive is expected to argue, in part, that he didn't believe Qwest was in trouble because he was aware of secret national security-related contracts that he expected the company to win.  Other executives who expressed concern about Qwest's ability to perform as expected didn't know about the potential classified contracts, Mr. Nacchio is expected to claim.

In earlier filings, the prosecution argued that Qwest's government contracts, even if they had come through as Mr. Nacchio expected, wouldn't have been big enough to solve the company's revenue problem.  The prosecution also argued that possession of potentially positive insider information wouldn't cancel out the crime of trading on negative insider information.

Write to Shawn Young at shawn.young@wsj.com

http://online.wsj.com/article/SB113962922326971613.html?mod=technology_main_whats_news