Nacchio foes start swinging
Lawyers lay out contrasting cases; testimony begins The ex-CEO's attorney says the Qwest board forced the sale of millions in stock; the government says Nacchio misled investors.
By Andy Vuong and Greg Griffin
Denver Post Staff Writers
March 21, 2007
Joe Nacchio's attorneys plan to show that he didn't want to sell his Qwest stock in late 2000 and early 2001 but that the board of directors insisted the then-chief executive sell the shares.
The government intends to show, on the other hand, that Nacchio deceived investors about the company's deteriorating finances while unloading $100.8 million in stock from January to May of 2001.
Those divergent theories were put before the jury by the two opposing sides during Tuesday's opening statements in Nacchio's insider-trading trial in Denver federal court.
To defend Nacchio against 42 counts of illegal insider trading, the defense will call former executives and board members to testify, including Qwest founder and former board member Philip Anschutz, defense attorney Herbert Stern said.
"Philip Anschutz will take the stand," Stern said.
But first, the government will call three key witnesses - former top Qwest officials Afshin Mohebbi, Robin Szeliga and Lee Wolfe - to show that they repeatedly warned Nacchio about Qwest's inability to meet overly aggressive targets for 2001, Assistant U.S. Attorney James Hearty said.
Wolfe, Qwest's former investor-relations director, began his testimony Tuesday after the openings.
He said Nacchio told his employees to "never say anything to make the stock price go down," which Wolfe coined the "golden rule." His testimony will continue today when the trial reconvenes at 8:45 a.m.
During a 90-minute opening, Hearty said that despite warnings from his top lieutenants, Nacchio continued to pump the company publicly to investors and analysts while unloading shares during the first five months of 2001.
"When Mr. Nacchio saw a storm coming at Qwest, he sold as much stock as he could as quickly as he could," he said.
Stern countered that Nacchio disregarded his top officials' concerns about Qwest's financial condition at the time because he had top-secret information that led him to believe Qwest would receive additional business.
"He had access to classified information about potential work that he believed was available to Qwest in 2001," Stern said. "He had additional information that they did not have."
Stern spoke only briefly about the classified-information defense strategy during a two-hour-long opening statement, leaving the impression it wasn't a key focus of the defense.
The strategy, which could lead to the disclosure of classified information, consumed enormous amounts of pretrial time and forced the judge to hold several closed-door hearings to determine whether and how top-secret information will be introduced.
Stern went into detail about warnings that Qwest stated publicly in its regulatory filings about how financial projections were subject to market conditions and other risks. Stern also spent much of his time talking about Nacchio's discussions with the board about his stock options and his relationship with Anschutz, the board chairman who hired Nacchio.
Stock options at issue
Stern said Nacchio asked the board in late 2000 to extend the expiration on millions of stock options that were set to expire in 2003.
"They weren't willing to do it," Stern said, because changing rules on the options could have affected Qwest's earnings.
Stern said he would call former management at Qwest to prove this point, but only An schutz's name was mentioned in the opening as a witness.
Anschutz personally cut Nacchio a check for $11 million to lure Nacchio from AT&T to Qwest in 1997, Stern said. Nacchio didn't want to leave New Jersey because one of his two sons was ill at the time. In addition to the $11 million, Anschutz agreed to let Nacchio commute between Denver and his home in Jersey instead of moving to Colorado.
Stern later revealed that Nacchio's younger son, Michael, who has attended both days of the trial, was suicidal in early 2001, which almost led Joe Nacchio to resign from Qwest.
Nacchio swelled with emotion, as did his son and several supporters in the courtroom, when Stern mentioned Mi chael Nacchio's illness.
Though the point may humanize Joe Nacchio, it isn't a valid defense against illegal insider trading, said University of Denver law professor Jay Brown.
"Even if he left the company due to his son's illness and attempted suicide, the prohibitions on insider trading still apply," said Brown, who is working for The Denver Post as a paid consultant. "He still can't trade if he had material nonpublic information."
Hearty called the government's case against Nacchio "simple" and "straightforward."
"We will prove that the playing field was not level," Hearty said. "There would have been no problem with Mr. Nacchio selling that stock if he had told investors outside Qwest ... about the problems that he knew about."
Hearty listed the following problems:
In September 2000, Nacchio set aggressive new earnings targets for Qwest and later confirmed those targets despite clear warnings from other executives that they were too high.
Qwest predicted revenue- growth rates at two to three times its competitors', but when other companies told investors in late 2000 that their revenue growth was faltering, Qwest stood by its numbers and its stock shot up.
Former chief financial officer Szeliga told Nacchio the targets were too high by $1 billion, roughly 40 percent of the $2.5 billion in total growth in revenue Nacchio had forecast.
The targets needed Qwest to significantly boost revenue, even though the company increasingly relied on "one-timers," single-transaction sales of network capacity.
Among the evidence that Hearty touched on during his presentation was a note that Nacchio signed Dec. 13, 2000, instructing a stockbroker to sell more than 350,000 shares of Qwest stock Jan. 1 and 2, 2001.
Nacchio indicated he was not aware of inside information at the time he signed it. But Hearty said Nacchio backdated the document to Nov. 3.
Staff writer Andy Vuong can be reached at 303-954-1209 or email@example.com.