Prosecutors explore options in Qwest Case
Focusing on an insider-trading case against former executives instead of on accounting-fraud allegations may be more palatable for a jury, some say.

By Greg Griffin, Staff Writer
Denver Post
Sunday, August 28, 2005


Allegations of insider trading and false reporting are the linchpins of the government's investigation into former top Qwest officials, including ex-chief executive Joe Nacchio.

Prosecutors said in a court filing last month that their probe focuses on "insider trading and securities disclosures issues" from 2000 to 2002. They have indicated in other filings that they could file charges as early as November.

Nacchio's attorneys have said there was nothing illegal or improper in his actions at Qwest.

If prosecutors pursue an insider-trading case, they may rely less on allegations of widespread accounting fraud used by securities regulators in their civil lawsuits against Qwest, Nacchio and others.

Some say that strategy makes sense because the accounting scheme alleged at Qwest could be difficult to explain to a jury, and allow the defense to undermine the prosecution. An insider-trading case "would be much more attractive to take to a jury - not just that strange accounting quirks were used," said Columbia University law professor John Coffee.

"It's simpler and cleaner to say that at the same time (as the alleged accounting fraud), people were dumping shares and not looking out for shareholders," Coffee said. "That makes them look corrupt and venal instead of just using some kind of accounting tricks the jury doesn't understand."

Denver attorney Sean Connelly, a former federal prosecutor, said he thinks the government will go for more than insider trading. Charges that tie individuals to the larger accounting fraud at Qwest would secure a longer potential sentence.

"An insider-trading charge typically wouldn't carry as hefty a penalty as a multibillion-dollar charge of fraud involving the whole company," he said.

Yet, prosecutors failed to win jury verdicts last year against four midlevel former Qwest executives in a case that alleged accounting fraud. Each defendant was charged with 11 counts and the trial lasted seven weeks - twice as long as expected.

"They threw everything and the kitchen sink (at the defendants) hoping that something would stick. Some of the jurors resented that," said jury foreman George Gerstle at the time.

Two defendants were acquitted. The jury deadlocked on two others, who later pleaded to other charges.

Qwest, the Denver-based phone company, already has settled civil charges of accounting fraud and paid a $250 million fine.

Separately, Nacchio and 11 other former executives were charged in March with accounting fraud and other charges by the U.S. Securities and Exchange Commission.

The SEC lawsuit is on hold at the request of the U.S. attorney's office, which is interviewing key witnesses in its probe.

Prosecutors are working with a grand jury in Denver, which has the authority to make criminal indictments.

It's unclear whether the grand jury is taking direct testimony from former Qwest executives.

Often, prosecutors submit information from witness interviews to the grand jury without actually calling the witnesses to testify.

A Nacchio representative would not say whether the former CEO had been contacted by the grand jury.

Prosecutors already have charged former chief financial officer Robin Szeliga with a criminal count of insider trading.

She, Nacchio and former chief financial officer Robert Woodruff, whom Szeliga replaced, were accused of insider trading by the SEC in its civil suit.

Woodruff has denied the charges.

The SEC said Nacchio made profits of $176.5 million on stock sales from 1999 to 2002; Wood ruff made $36.8 million; and Szeliga made $267,000.

The SEC's complaint, filed in March, alleges that when they sold shares, the trio knew Qwest was in far worse financial shape than they represented to regulators and investors.

The SEC alleges that Qwest officials inflated revenue by $3 billion between 1999 and 2002.

Qwest is said to have secretly included one-time sales of fiber-optic network capacity in the company's recurring revenues.

In the criminal case, as in other white-collar prosecutions, the government has secured the cooperation of key witnesses.

Szeliga is providing information, as are former Qwest officers Grant Graham and Thomas Hall, who pleaded to lesser charges after the criminal trial last year.

Jacob Frenkel, a former SEC enforcement lawyer and federal prosecutor based in Maryland, said prosecutors could pursue elements of the SEC's complex accounting-fraud case against Nacchio without trying to prove the entire scheme.

If so, the government could file charges such as mail fraud, wire fraud, conspiracy, signing false statements and lying to regulators.

In the case of WorldCom, prosecutors were able to persuade a jury to convict former chief executive Bernard Ebbers on securities fraud, conspiracy and false reporting. A judge handed him a 25-year sentence.

In that case, prosecutors argued that WorldCom defrauded investors out of $11 billion through accounting tricks such as disguising operating expenditures as capital costs to boost quarterly earnings.

They used testimony from former chief financial officer Scott Sullivan to prove Ebbers knew of the fraud.

Staff writer Greg Griffin can be reached at 303-820-1241 or ggriffin@denverpost.com.

http://www.denverpost.com/business/ci_2977720