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Nacchio defense may not have revealed full hand
By Jeff Smith
Rocky Mountain News
Thursday, March 8, 2007


Joe Nacchio's attorneys and prosecutors have huddled in closed hearings recently, jostling over classified material that may be admitted at trial.  But is that just a diversion?

While Nacchio's legal team has strongly indicated it will pursue a national-security defense, that doesn't mean it will be the main defense at his insider-trading trial starting March 19 in Denver, an expert said.

"It may lead to the impression that this is the only defense they have," said John Cline, a California attorney who helped handle the classified information for Lewis "Scooter" Libby's defense team.  "This is just the one they have to offer pretrial.  It may turn out to be the key to their defense, or it may turn out to be a small part of their defense."

Cline, now with the law firm Jones Day in San Francisco, also worked on cases involving scientist Wen Ho Lee (who was accused of mishandling nuclear secrets) and former National Security Council aide Oliver North.

Cline said how a prosecution's witnesses do at trial may affect defense strategy.

The federal government accuses Nacchio of accelerating his stock sales during the first five months of 2001 while being warned the Denver telco's forecasts were a stretch. Nacchio faces 42 counts of insider trading in connection with more than $100 million of sales.

Nacchio's attorneys have argued he possessed classified information that led him to reasonably believe Qwest would be landing lucrative federal contracts.

Classified information has played a role in a number of trials over the years, including those of convicted Oklahoma City bomber Timothy McVeigh, convicted Sept. 11, 2001, terrorist Zacarias Moussaoui, and, most recently, Libby, former chief of staff for Vice President Dick Cheney.  Libby was convicted this week of perjury and obstruction of justice.

The Classified Information Procedures Act, enacted by Congress in 1980, spells out how parties are to handle secret information.

The process involves getting national security clearances for the attorneys and judge so they can examine the materials, protecting the information at secure sites, and holding closed hearings in which the defense and prosecutors argue before a judge about the relevance of the information.

CIPA "requires the defense to lay out its theory in great detail," Cline said.  To even the playing field, the government has been ordered to turn over the rebuttal evidence it anticipates using at trial.

In some cases, the government may decide to drop a prosecution rather than risk disclosure of sensitive matters.  Nacchio's attorneys sprung the national security defense just as he was about to be indicted in late 2005.

With the hands now shown, the defense may or may not decide to pursue the defense as its main strategy.

"For any number of reasons, the defense may decide to forgo" the national security defense, Cline said -- or make it a minor part of the defense.

Cline wouldn't discuss the Libby case.  But news reports indicate the use of classified information was limited by the judge after Libby decided not to testify.

Nacchio's attorneys have alluded to other defenses, such as maintaining that the warnings he received about Qwest's prospects didn't constitute material information required to be disclosed to investors.

Cline has read about Nacchio's national-security defense in general, and "the basic theory makes sense to me, if that's what the guy's state of mind was."

Others, such as former federal prosecutor Chris Bebel in Texas, have said the strategy seems "desperate" but represents "clever lawyering."

State of mind is a critical aspect of the case.

U.S. District Judge Edward Nottingham has ruled the government must show Nacchio had a willful intent to defraud.  That means Nacchio needs to be found guilty of more than just an honest mistake.

The defense argues Nacchio reasonably anticipated Qwest was in line to land hundreds of millions of dollars of sensitive federal contracts that would more than offset the negative warnings he was receiving about the company's prospects.

"We intend to prove that Mr. Nacchio's knowledge was not shared with any of the Qwest employees alleged to have given him 'warnings,' " his attorneys said in a filing made public in December.

Nacchio's attorneys maintain clandestine agencies approached Qwest to take on "top secret, national-security-related projects," including a new fiber-optic network to Europe and the Middle East.  Some already were Qwest customers.

Prosecutor Leo Wise, who has a background in naval intelligence, said in court recently the government has evidence that contradicts Nacchio's version of events.  Wise specifically referred to discussions that Nacchio maintained resulted in a government contract, while the agency said the talks had broken off.

What makes the national security defense tricky in part is that the judge has to approve "substitutions," or summaries that reflect the relevant evidence without giving away national secrets.  Those substitutions will be presented to the jury and may omit things such as sensitive details of a contract or the name of a clandestine agency.

The substitutions have to provide substantially the same ability for Nacchio to mount a full defense as would the actual classified materials, Cline said.

"It's a tough call for the judge to make, particularly if Mr. Nacchio ends up testifying.  Substitutions are a difficult thing."

In the Nacchio case, Nottingham indicated some substitutions have yet to be resolved.

Several legal experts have said that if Nacchio is convicted, his attorneys may argue on appeal that certain critical evidence was withheld from the jury.  Nottingham already has ruled some classified information is irrelevant.

Defense arguments

Nacchio's attorneys have revealed their national-security defense theory in full, but it's too early to know whether that will be the key defense in the former Qwest chief executive's insider-trading trial.  Here are some of the arguments that may be used, likely in combination:

  National security:  Nacchio possessed classified information that led him to reasonably believe Qwest would land secret federal contracts that would more than offset the negative warnings he was receiving about the company's financial prospects.

  Materiality:  None of the warnings Nacchio received was material enough to require disclosure to investors.

  Willful intent:  Nacchio acted in good faith;  he made honest mistakes or miscalculations.

  Stock sales:  Nacchio was advised to sell stock holdings in the first five months of 2001 even though he thought it was still a good stock to buy.

smithje@RockyMountainNews.com or 303-954-5155

http://www.rockymountainnews.com/drmn/tech/article/0,2777,DRMN_23910_5402099,00.html