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'Classified' defense attacked
Ex-CEO didn't take secret info tack because it was 'a lie,' Stricklin says
By Sara Burnett and Jeff Smith
Rocky Mountain News
Friday, October 12, 2007

Former Qwest CEO Joe Nacchio didn't present a classified information defense at his insider-trading trial because it was "a lie," the lead prosecutor in the case said Thursday.  "They couldn't do it because if they had, it would have been proven false," First Assistant U.S. Attorney Cliff Stricklin said.

Stricklin's comments came one day after court documents related to Nacchio's classified defense, previously filed under seal, were made public.

Those documents, filed by Nacchio's defense team, said Nacchio believed when he sold stock between January 2001 and May 2001 that the company was about to receive lucrative secret government contracts.

They also suggest Nacchio wanted to argue that the National Security Agency and other clandestine government agencies never granted Qwest the contracts because the Denver telco wouldn't participate in a phone spying program.

Speaking at a luncheon at the Denver Athletic Club, Stricklin said prosecutors were prepared to discredit those arguments.  He also said that if Nacchio had taken the stand, the government could have presented evidence to prove Nacchio "a liar."

Told of Stricklin's comments, Nacchio's lead defense attorney, Herbert Stern, said only, "If Mr. Stricklin is accurately quoted, his remarks are untoward and unprofessional."

Stern declined to comment further.

Nacchio, who was convicted in April of 19 counts of insider trading, is free on bail pending his appeal.

If the appellate court upholds his conviction and sentence, he faces six years in prison, a fine of $19 million and forfeiture of the $52 million he made on the illegal sales.

At trial, prosecutors said the CEO should have told investors before he sold his stock that the company was unlikely to meet aggressive revenue goals.

Nacchio's defense attorneys argued he was optimistic about the company's future, in part because of the secret government work.

The documents released Wednesday, parts of which were redacted, suggest U.S. District Judge Edward Nottingham prevented Nacchio from making his argument about retaliation, ruling it was not relevant.

That left Nacchio with a dilemma -- he could testify that he believed Qwest was in line for the government contracts but not about his theory on why the company didn't land them.  And if he took the stand, prosecutors were free to call witnesses they said would refute his testimony.

Nacchio opted not to present much of a defense, calling just three witnesses and not taking the stand.  But the issue of how Nottingham ruled is part of his appeal before the 10th Circuit Court of Appeals.

The documents released Wednesday also show that by November 2005, three years after Nacchio's ouster from Qwest, the government had advised Nacchio's attorneys that it was considering seeking insider-trading charges against him.

Nacchio's attorneys attempted to stave off an indictment, in part by raising the classified-information defense for the first time.

In a letter dated Nov. 2, 2005, to the Justice Department, Nacchio's attorneys wrote that the government's theory implicated "classified information and, thus, national security concerns."

They stated that Nacchio was the only member of Qwest's senior management cleared for classified information and that those matters supported his "good faith belief" in the telco's revenue prospects.  They asked for time to get national security clearance to fully debrief Nacchio on the topic.

The government didn't have much time to evaluate whether a classified information defense would pose a problem to its case.

Prosecutors had planned to seek insider trading charges that month.  They wanted the charges to cover Nacchio's stock sales between Jan. 1, 2001, and May 29, 2001.  But the five-year statute of limitations on those early sales was close to expiring.

After Nacchio floated the possible classified-information defense, the feds scrambled to interview James Payne, who oversaw Qwest's federal business group.

They conducted the interview on Nov. 14, 2005.  Payne told an FBI agent and U.S. postal inspector that he only included contracts Qwest had won in his revenue projections and that he was careful not to set expectations that couldn't be met.

He talked some about the speculative nature of the federal contract business, referring to a project code-named "Ferrari" that continually was out there as a possibility.

On Nov. 17, 2005, Stern again wrote the Justice Department, saying that while Payne would be in the position to confirm some of the prospective contracts, "his access is far more limited than Mr. Nacchio's."

"I wish that I could provide the details of this information," Stern added, "but I am unfortunately disabled by the fact that I cannot even interrogate my client on this area, not even for the purpose of defending him and attempting to persuade the Department that he should not be indicted."

Stern asked for a security clearance.  But, with the statute of limitations running out, the government couldn't wait and in December 2005 sought an insider-trading indictment against Nacchio.

Stern and his team didn't get national security clearances until later during the pretrial process.

http://www.rockymountainnews.com/drmn/tech/article/0,2777,DRMN_23910_5720619,00.html