mind called key in Qwest case
By Greg Griffin, Staff Writer
Sunday, February 4, 2007
ImClone Systems' Samuel Waksal urged his daughter to sell
her stock right before bad news was announced -- then he
lied to investigators. He pleaded guilty and went to jail.
Former Worthington Foods director Roger Blackwell passed
news of merger talks to associates and tried to hide the
evidence, but his ex-wife turned on him. A jury convicted
It may not be so easy to put away former Qwest chief
executive Joe Nacchio, legal experts say. He sold stock
over a five-month period, and there may be no "smoking gun"
tying those trades to his insider information.
"This is not a slam-dunk case. They'll be asking the jury
to draw a lot of inferences about why Joe Nacchio sold his
stock," said law professor and white-collar-crime expert
Peter Henning of Wayne State University in Detroit. "What
was he thinking when he made those trades? That's what
we're left to guess about."
Nacchio is accused of selling $100.8 million in Qwest shares
from January to May 2001, when he allegedly knew the
company's finances were deteriorating. Prosecutors allege
that Qwest didn't begin to disclose looming financial
problems until it lowered its stock guidance in September
Nacchio faces 42 insider-trading counts, each of which
carries a maximum 10-year prison term. He has pleaded not
guilty and is free on bond. His trial is scheduled to begin
Qwest's shares fell from $38 in mid-May 2001, when Nacchio
made his final stock sales, to $1.11 in August 2002.
Former Qwest chief financial officer Robin Szeliga and
former Qwest president Afshin Mohebbi are expected to
Szeliga told investigators she urged Nacchio to publicly
disclose more information on the company's financial risk,
according to court documents. Mohebbi told investigators
that he advised Nacchio more than once that he thought
Qwest's earnings estimates were too high, according to
Szeliga has pleaded guilty to one count of criminal insider
trading for a trade she made in April 2001. Mohebbi, who
did not sell Qwest shares, may receive immunity for his
The Securities and Exchange Commission claims in a civil
fraud case that Nacchio, Szeliga and former Qwest finance
chief Robert Woodruff traded on insider information for
total profits of $213 million.
In the criminal case, Nacchio's attorneys claim the warnings
he received were wrong because he alone knew that Qwest
might receive lucrative, top-secret contracts from the
Another potential defense is that Nacchio made stock sales
as part of a scheduled trading program, and that in some
cases the Qwest board directed him to sell.
Harvey Pitt, who defended notorious inside-trader Ivan
Boesky and later headed the SEC, said the government may
benefit from the duration of Nacchio's trades.
"If there's trading over a longer period of time, that can
potentially help prosecutors," he said. "If someone didn't
do this just once but on numerous occasions, that can make
it more impressive."
Another strength for the prosecution is that Nacchio sold
more than $100 million in stock, a large number that will
make an impression on jurors. The trades were at a
noticeably faster pace than he had sold stock before.
What must be proved?
There were 24 people indicted on suspicion of criminal
insider trading from October 2005 to October 2006, and 15
people were convicted, according to the U.S. Department of
Justice. Nacchio was charged in December 2005.
Prosecutors must prove not just that Nacchio possessed
insider information, but that he used it when he sold his
They also must prove that he acted "willfully and with the
intent to defraud, manipulate or deceive," U.S. District
Judge Edward Nottingham wrote in a filing. A key issue may
be whether Nacchio and his attorneys can convince jurors
that he believed his actions were not improper.
"The prosecution is going to have to ask the jury to make
inferential leaps of faith regarding Nacchio's state of mind
regarding his securities trading," said Greg Goldberg, a
white-collar-crime defense attorney with Holland & Hart in
Denver. "It can be done, but it's difficult."
Unlike some high-profile insider-trading cases, Nacchio's
doesn't involve the quick succession of events occurring in
minutes, hours or days that can help make circumstantial
evidence credible to a jury.
"The more that the time between the receipt of information
and the transaction grows, the less strong is the inference
that the trading is because of the information," Henning
The case also appears to lack a coverup or the testimony of
someone tipped by Nacchio with inside information -- in
other words, the "smoking gun."
Comparable to Skilling's
The closest comparison to Nacchio's case is that of Jeffrey
Skilling, who was convicted in May on only one of 10
insider-trading charges. The jury found the former Enron
CEO guilty of fraud but was mostly unconvinced by
prosecutors' contention that his $62 million in stock sales
during a 17-month period was illegal.
On the one insider-trading count that stuck, prosecutors
caught Skilling in what appeared to be a lie.
Skilling testified that he sold shares for $15.5 million on
Sept. 17, 2001, because he was worried about the economy
after the terrorist attacks six days earlier. But the
government produced a taped conversation with a stock broker
in which Skilling had first attempted to sell the shares
The lie or attempted coverup is often a prosecution
Waksal, the former ImClone CEO, told investigators he didn't
contact relatives and associates prior to their trades in
December 2001. But the government said phone records proved
otherwise. He pleaded guilty to securities fraud, bank
fraud, conspiracy to obstruct justice and perjury.
Blackwell was convicted in June 2005 of tipping off friends
and relatives in 1999 about Kellogg Co.'s unannounced,
pending purchase of Worthington Foods. He was a Worthington
Foods director and Ohio State University professor at the
time. The case turned on the testimony of his ex-wife, who
said the couple gave her mother money to buy Worthington
shares and later destroyed evidence.
Boesky, the Wall Street financier who pleaded guilty to
insider trading in 1986, testified in the 1990 trial of an
associate that he had lied repeatedly to investigators.
Among other transactions, Boesky made $28 million trading on
insider information when Nestle bought Carnation in 1984.
His cooperation helped prosecutors nail junk-bond trader
Michael Milken. Boesky was jailed for 22 months and fined
"In other prominent insider-trading cases, defendants have
been caught hands-down in a lie," Goldberg said. "That's
where others who've pled guilty or are cooperating with the
government come into play. They can testify as to what
Nacchio said and did."
Craig Silverman, a former Denver chief deputy district
attorney, said the challenges facing Nacchio's prosecutors
"It's tough to reach into somebody's mind and pull out proof
beyond a reasonable doubt that this is what this man was
thinking. But prosecutors do that all the time," he said.
"Every crime requires proof of the culpable mental state.
And you prove that circumstantially."
civil and criminal securities fraud in November 1986.
Earned tens of millions of dollars buying and selling stock
on inside information about forthcoming corporate
guilty to one criminal count of conspiracy to commit
securities fraud. Helped the government convict junk-bond
giant Michael Milken and others.
paid an investment banker for stock tips with suitcases full
three years in prison but released on parole after 22
months. Paid $100 million to settle civil charges.
13 criminal counts, including securities fraud, conspiracy
to commit securities fraud, obstruction, perjury and bank
fraud in August 2002 as part of an insider-trading case.
The ImClone Systems CEO learned in December 2001 that the
Food and Drug Administration rejected its experimental
cancer drug. He then tipped off at least one family member,
who sold stock before the bad news was announced.
guilty to eight counts.
phone records to relatives and associates made immediately
before stock sales and one day before announcement.
June 2003 to seven years and three months in prison and
ordered to pay nearly $4.3 million.
10 counts of insider trading as part of a larger fraud case.
guilty. He was convicted in May of 18 counts of fraud and
conspiracy and one insider-trading count.
On the insider-trading count, prosecutors played an
audiotape of Skilling's conversation with a stock broker
that contradicted his sworn testimony explaining the trade.
October to 24 years and four months in prison. He is
appealing the sentence.
Staff writer Greg Griffin can be reached at 303-954-1241 or