Picking up the tab
Defending Nacchio, other execs already has cost Qwest $1 billion
By Jeff Smith
Rocky Mountain News
Friday, March 16, 2007
Qwest Communications has blown through more than $1 billion
since 2002 defending itself and its former officers and
directors from civil and criminal fraud allegations. Some of
those expenses, including various settlements, have been
reimbursed by insurance carriers. But even on that score, the
Denver telco has taken a big hit and today could be forking over
money from its coffers to defend former CEO Joe Nacchio and pay
his expenses during his upcoming insider-trading trial.
Insurance carriers moved to cancel coverage in late 2002,
claiming Qwest had filed applications based on false or
misleading financial statements. Qwest at the time was in the
process of erasing revenue from its 2000 and 2001 books.
In a mediated settlement, Qwest agreed to pay $157.5 million to
salvage $350 million worth of liability coverage for directors,
officers and the employee benefit plans.
Nacchio's legal fees have at least been partly paid by insurance
since then. Qwest CEO Dick Notebaert said as much at the
company's 2005 annual stockholders meeting.
For example, Nacchio's attorney, Herbert Stern, said recently
that Nacchio's $1.5 million settlement with the California State
Teachers' Retirement System came out of insurance money.
Qwest wouldn't comment about whether any insurance money is left
or eligible to cover Nacchio's expenses now. Such insurance
policies have become narrower in their coverage, and some don't
cover criminal allegations, said Texas attorney Michael Sean
Quinn, who examined some of Qwest's regulatory filings, said the
insurance proceeds could be depleted because of the civil
That would mean Qwest would be left footing Nacchio's bill.
Corporations, to attract top talent, typically agree to
"indemnify" executives. Qwest's bylaws require it to advance
legal fees to officers involved in civil or criminal
proceedings. Nacchio's June 2002 severance agreement included a
provision requiring Qwest to continue indemnification.
That could make for some interesting expense statements for
Qwest to pay during Nacchio's trial starting Monday. Nacchio
and most of his defense team will be flying from New Jersey each
week for a trial that will run four days a week and up to eight
weeks in all.
That's a lot of airplane tickets, hotel or rental expenses,
restaurant bills, and the like.
An insurer or company typically would pay "reasonable expenses"
and the rest would be negotiated, Quinn said. But what might be
reasonable to an assistant vice president is different than
what's reasonable to a former chief executive, he said.
Clearly, Nacchio already is paying top dollar to Stern, a former
federal judge and prosecutor who has an almost legendary
record. If other corporate fraud cases are an indication,
Nacchio's criminal defense likely is costing tens of millions of
Nacchio and his team may get a free pass to stay in luxury
accommodations and eat at some of Denver's finest restaurants.
"I don't think the company is going to make an issue of it,"
Quinn said. "He's been staying at nice hotels for years.
Unless the company is going broke, they're not going to regard
that as crucial. A $100 bottle of wine here and there -- no one
is going to bitch about that. Insurance companies would bitch
Quinn said expenses usually aren't the biggest problem anyway.
A larger issue, he said, is that lawyers are "prone to
exaggerating hours" or being poor record keepers.
Barring litigation over Nacchio's legal fees and expenses, Qwest
shareholders may never know the final amount the company has
Qwest spokesman Bob Toevs said "there's no plans at this time to
call out those expenses in our reporting." The company does
have the right to go after certain expenses if Nacchio is
The lack of transparency irks Nelson Phelps, executive director
of the Association of U S West Retirees.
"It seems like there should be some honesty upfront as far as
sharing what the expenses are . . . (but) we consistently have
trouble getting information (from Qwest). It's an ongoing fight
for us," Phelps said.
Phelps said retirees would be upset to know Qwest might foot the
bill for expensive restaurants and pricey accommodations for
Nacchio's defense team.
"That's the type of stuff that really irritates you."
Qwest Communications has spent more than $1 billion since 2002
defending itself and former officers and directors from civil
and criminal litigation. Here are some of the biggest expenses:
• Class-action securities fraud settlement
(Arthur Andersen paid $10 million)
Figures in millions $390
• SEC settlement of fraud allegations
Figures in millions 250
• Payment to salvage directors, officers and
employee benefits insurance coverage
Figures in millions 158
• Class-action settlement for failing to pay
dividend after merger with U S West
Figures in millions 50
• Joe Nacchio's criminal defense
Tens of millions
• Securities fraud settlement with California
State Teachers' Retirement System (Shared by Qwest and
Figures in millions 47
• Class-action settlement related to Qwest's
alleged mishandling of its employee savings and investment plan
Figures in millions 38
• Settlement of allegations that Qwest executives
and directors breached their fiduciary duty
Figures in millions 25
• Class-action settlement related to fraud
allegations at the European joint venture KPNQwest ($5.5
million in cash, $5.5 million in stock)
Figures in millions 11
• Note: In addition to this big-ticket list,
Qwest has spent hundreds of millions of dollars in other
litigation expenses since 2002 in connection with lawsuits,
investigations and defenses of former executives and directors.
For example, Qwest paid the legal expenses of two midlevel
executives acquitted of conspiracy and fraud in 2004 and has
been paying for Nacchio's defense against civil-fraud lawsuits.
The total: $1 billion
The trial of former Qwest CEO Joe Nacchio starts Monday in
Denver with jury selection. Opening statements are expected
Tuesday or Wednesday. Nacchio faces 42 counts in connection
with selling $100.8 million of Qwest stock in the first five
months of 2001.
smithje@RockyMountainNews.com or 303-954-5155