relevations about Nacchio's defense
Filings lend "some plausibility"
By Greg Griffin and Andy Vuong, Staff Writers
Sunday, January 21, 2007
A single phone call landed Qwest a top-secret contract in
1999 to install a fiber-optic line for the federal
government. There was no bidding.
Soon Qwest was doing business with four clandestine
government agencies. By early 2001, Qwest had been awarded
more than $1 billion in classified work from just one of
Then-chief executive Joe Nacchio was in discussions for
additional black-book contracts worth hundreds of millions
of dollars, including construction of a fiber-optic network
to Europe and the Middle East.
That's how Nacchio describes his involvement in the
clandestine world of classified government work in documents
recently unsealed in his criminal insider-trading case.
The documents, filed between May and October and unsealed in
December, have been redacted to shield classified
information from public view. But they still contain new
information about Nacchio's defense against federal
It's difficult to know how much of what Nacchio describes,
through his attorneys and a federal judge, is true. Much of
the information is sketchy. Whether it was Nacchio or
someone else on the phone in 1999, for example, isn't
Nacchio is charged with 42 counts of criminal insider
trading related to his sale of $100.8 million in Qwest
shares from January to May 2001. Each count carries a
maximum 10-year prison term. Nacchio has pleaded not
guilty. The trial is scheduled to begin March 19.
The government contends the trades were illegal because
Nacchio knew the company's financial prospects were in worse
shape than the company had acknowledged.
Qwest suffered huge financial losses before Nacchio was
forced out in mid-2002. The phone company's stock fell from
$64 in 2000 to $1.11 in August 2002, a drop in market
capitalization of $91 billion. The company later restated
its revenues and earnings by $2.5 billion.
Nacchio's defense team asserts that he alone understood the
company's prospects in early 2001, and that he believed they
"The classified information known to Mr. Nacchio during the
time he traded allowed him to reasonably anticipate the
award of classified government contracts," Nacchio attorneys
Herbert Stern and John Richilano wrote in the May filing.
"Nacchio had ... observed the manner and frequency with
which his classified discussions about potential new
projects ultimately bore fruit as actual contracts."
Experts said the recently unsealed documents begin to flesh
out what has until now been a mysterious defense strategy.
"It lends some plausibility to his defense, which otherwise
might come across as almost laughable," said law professor
and white-collar-crime specialist Peter J. Henning of Wayne
State University in Detroit. "He can make the claim that it
was not unreasonable to be optimistic, even though he turned
out to be wrong."
At least one top former defense official involved in
government telecommunications contracts, though, disputes
the notion that his agency handed out contracts without
"We put contracts out and encouraged people to compete for
business," said Lt. Gen. Harry Raduege, former director of
the Department of Defense's Defense Information Systems
Agency. "To imply that I was going to give someone
preferential treatment, or only meet with one person to
discuss needs, that's totally inappropriate, and I never did
anything like that."
Attorney Richilano declined to comment.
The new court filings reveal other contentions by Nacchio
and his lawyers:
- James F.X. Payne, former senior vice president of Qwest's
Government Systems Division, emerges as a key figure in the
case. According to Nacchio's lawyers, Payne has verified
the former CEO's contention that potential classified
contracts were not included in Qwest's public statements
about its prospects.
- Nacchio had contract discussions with officials at DISA
and at least two other agencies.
- Nacchio believed that by helping the government move its
covert communications to secure fiber-optic networks, he was
directly involved in "cyber-warfare" with hostile foreign
powers and rogue states.
The prosecution's case against Nacchio is built, in large
part, on warnings he received from other Qwest executives in
late 2000 and early 2001 about looming financial problems --
a period during which Nacchio was selling big chunks of
Qwest stock. Former president Afshin Mohebbi and former
chief financial officer Robin Szeliga both issued such
warnings, according to court documents.
The government contends those warnings prove that when
Nacchio sold the shares, he was aware of "material,
nonpublic information" that would affect Qwest's stock
Nacchio's attorneys said in a document filed in May that the
pending classified deals offset what he learned from the
"We intend to prove that Mr. Nacchio's knowledge was not
shared with any of the Qwest employees alleged to have given
him 'warnings,"' they wrote. "Nacchio reasonably believed
that those criticizing the guidance (to Wall Street on
Qwest's prospects) were mistaken, and that Qwest's public
guidance remained accurate, if not actually low."
A $430 million contract
Qwest launched its government division in Washington in
February 1998. Two months later, Qwest announced it had won
a 10-year, $430 million contract with an unnamed agency of
the federal government.
Dean Wandry, senior vice president of government markets for
Qwest at the time, told The Denver Post last week that "a
great bulk" of the division's work was classified.
"I can't speak for what (Nacchio) knew or what he thought.
I was there in 1998 and 1999," Wandry said. "It's
classified information. Not 100 percent, but a great bulk
Wandry, 66, said he has been contacted by attorneys in the
case but does not yet know whether he will testify.
The government has interviewed Payne, Wandry's successor,
and was ordered by U.S. District Judge Edward Nottingham in
October to give Nacchio's attorneys permission to speak to
Payne, 55, told prosecutors in a November 2005 interview
that he worked directly with Nacchio on potential classified
contracts, which were given code names such as "Ferrari,"
according to an open-court record filed by Nacchio's
attorneys in May.
Payne said he did not include such potential contracts in
his financial reports until they came to fruition because he
regarded them as speculative.
One expert said Payne could be a critical witness for
Nacchio. "Payne's important," said former federal
prosecutor William Mitchelson. "Whether or not these ...
estimates included these potential secret contracts is
important to whether Nacchio knew something that no one else
Payne left Qwest in May 2005 and now works for San
Francisco-based government contractor Bechtel. He did not
return a call for comment.
Payne introduced Nacchio to Raduege, commander of DISA,
according to Nacchio's May filing unsealed last month.
The Defense agency had already awarded Qwest $500 million in
contracts at the time.
Nacchio had a series of meetings with Raduege from mid- 2000
to spring of 2001 in which the commander inquired about how
Qwest could help make the Pentagon less susceptible to
attacks from hackers.
An Oct. 24 order by Nottingham, part of which was unsealed
in December, provides more details of Nacchio's dealings
with secret government agencies.
"As he relates the chronology, Qwest's classified contracts
and contacts commenced with an award by one of the agencies
and thereafter blossomed into prospects for classified work
from the other agencies after Qwest's initial work proved
successful," Nottingham wrote. "Those contracts were,
according to him, awarded swiftly by reallocating
already-appropriated funds from one account to another and
did not go through a lengthy appropriations or bidding
It's unclear whether Nacchio's national-security strategy
will pay off. Experts agree it's a novel defense not used
before in an insider-trading case.
"It's a clever strategy," Mitchelson said. "It'll be
interesting to see whether he gave some indication to his
other corporate officers about whether or not he expected
new contracts from some force that he couldn't discuss."
But another white-collar-criminal expert was skeptical.
"The question for the jury is whether he knew material,
nonpublic information that might affect the market in the
short run, when he sold the stock," said Columbia University
law professor John Coffee. "The fact that he had
information that would offset that in the long term, that
doesn't seem to me to be a defense."
Staff writer Greg
Griffin can be reached at 303-954-1241 or