Nacchio verdict may affect civil suits
The jury's decision is likely to affect the course of civil
actions, in which monetary stakes are high and the burden of
By Greg Griffin, Staff Writer
Sunday, April 15, 2007
Joe Nacchio's legal problems with the government began with
civil charges that he orchestrated a $3 billion accounting fraud
at Qwest from 1999 to 2002.
The former Qwest chief executive will still face those claims
once a verdict is delivered in his criminal insider-trading
In the civil case, the Securities and Exchange Commission seeks
hundreds of millions of dollars from Nacchio and four other
former Qwest executives.
But what happens in that case depends on what the jury decides
in the criminal matter.
"The SEC's case is riding on the coattails of the criminal
verdict," said Jacob Frenkel, an attorney in Rockville, Md., who
has worked as both a federal prosecutor and an SEC lawyer.
"The verdict has a direct legal impact on the civil case." If
jurors find him guilty of any or all 42 criminal counts of
insider trading, Nacchio might have little choice but to settle
the SEC claims. A guilty verdict would prove the SEC's civil
insider-trading claims and strengthen its hand in proving the
other claims, Frenkel said.
What the SEC could get from Nacchio would depend on how much the
government receives through the criminal case, and what assets
he has left. He could be ordered to pay fines of up to $42
million and forfeit up to $100.8 million earned on his trades.
Nacchio also faces a prison term of up to 10 years.
A full acquittal or mistrial would likely embolden Nacchio to
fight the SEC. That would be a high-stakes battle because the
SEC claims Nacchio made profits of $176.5 million selling Qwest
stock during the alleged fraud. The government could seek three
times that amount plus interest and additional penalties.
An acquittal would not weaken the SEC's case from a legal
standpoint, but it could force the government to offer Nacchio
favorable settlement terms, Frenkel said.
The SEC sued Nacchio and six other former Qwest executives and
accountants in March 2005, alleging a "massive financial fraud"
that caused Qwest to record about $3 billion in false revenue.
The SEC described Qwest under Nacchio as "a culture of fear,"
with subordinates desperate to meet his demands to hit revenue
Two defendants have settled the claims without admitting or
denying guilt. Former wholesale-markets chief Gregory Casey
paid $2.1 million; former chief financial officer Robin Szeliga
has agreed to pay $577,000. A judge must still approve
Szeliga's deal, which her attorneys filed in court April 5.
Nacchio, former chief financial officer Robert Woodruff, former
president Afshin Mohebbi and former accountants James Kozlowski
and Frank Noyes have denied the allegations.
Those defendants would benefit from a Nacchio acquittal on the
criminal charges, said former chief SEC accountant Lynn Turner,
who is now director of research for Glass Lewis & Co., an
Conviction of Nacchio would put "tremendous pressure" on the
other defendants to settle, Turner said.
The SEC's case has been on hold since mid-2005 to avoid
conflicts with the criminal case. But a federal magistrate on
April 6 lifted most of the interview and evidence restrictions
in the case, allowing progress to resume. Still, no trial date
has been set.
Also pending is a class-action shareholder lawsuit against
Nacchio and Woodruff, seeking collective damages from stock
losses. Qwest paid nearly $400 million in 2005 to settle its
part of the shareholder claims.
In 2004, Qwest paid a $250 million fine to the SEC in connection
with allegations of accounting fraud.
The SEC and shareholder cases are broader than the criminal case
against Nacchio, which focuses only on his insider-trading from
January to May 2001.
Because illegal insider-trading charges must be proven beyond a
reasonable doubt, conviction would have the effect of proving
the SEC's insider-trading charges. Civil cases may be proven
based on a preponderance of evidence, a lower standard. In
addition to insider trading, the SEC alleges securities fraud,
wire fraud, deceit of auditors, falsified books and records and
false SEC filings.
The SEC suit describes in great detail swaps of fiber-optic
network capacity by Qwest with other telecom companies. Both
companies logged revenues from the deals, but neither benefited
Qwest management and employees referred to such swaps as a
"drug," an "addiction," "heroin," and "cocaine on steroids."
Qwest lost $91 billion in market value from 2000 to 2002 because
of the telecom bust and concerns about the company's accounting.
It remains to be seen how much money federal authorities will be
able to collect from Nacchio, whether through the criminal or
He made $250 million selling Qwest stock between 1998 and 2002.
His severance pay after departing in June 2002 amounted to $15
million. His former financial adviser testified during trial
that Nacchio's net worth was $547 million in December 2000,
though much of that was in unvested Qwest stock options.
Prosecutors said Nacchio transferred $90 million into his wife's
name in 2002. The Nacchios own a $3 million house in Mendham,
N.J., a $1.4 million house in Long Beach, N.J., and a $9.5
million house in Florida.
Staff writer Greg Griffin can be reached at 303-954-1241 or