What world are the judges and Nacchio's defense living in
By David Milstead
Rocky Mountain News
Wednesday, December 19, 2007
If the judges on the 10th Circuit Court of Appeals aren't living
in the same alternate reality as his defense attorneys, they
seem to be neighbors.
Once again, we are treated to a world in which Qwest made its
numbers every quarter, where Judge Paul Kelly seemed to embrace
the defense argument that all those Qwest executives raising
revenue red flags were self-interested schemers intent on
inflating their bonuses by underpromising and overdelivering.
"Didn't they make (the revenue) goals before?" Kelly asked.
"Why wouldn't it happen (in 2001)?"
This is unfortunately, the sandbox the prosecution chose to play
in by bringing a case that wasn't based on accounting fraud.
Out goes the multibillion-dollar restatement for Qwest's bogus
numbers. In is the defense argument that "the company met
or exceeded its public number for 17 straight quarters."
I am confused, honestly, by arguments about materiality as a
matter of law, when Nacchio appellant attorney Maureen Mahoney
can cite a dismissed case in which a company failed to disclose,
seven weeks before the quarter's end, it would miss projection
by 24 percent. The stock dropped 30 percent when it was
disclosed, and this, Mahoney said, didn't meet the standard of
"extreme departure" from the projections?
Mahoney cited an SEC bulletin on materiality that gave as "a
guidance" the figure of 5 percent of revenues. If Qwest
missed the low end of its revenue range by $3400 million, the
defense argues, that would only be 1.4 percent of $21.3 billion,
and therefore immaterial, she said.
Good God. Let me summarize the problem at Qwest in 2001.
Nacchio told everyone on Wall Street that Qwest was a special
company that could produce double-digit revenue growth when all
its stodgy competitors couldn't. The only way the company
was doing that, however, was through hundreds of millions of
dollars of one-time network-capacity sales. Qwest wasn't
disclosing that. Investors were misled into thinking that
it was posting sales growth of more than 12 percent. Take
the one-time sales out, and the figure was around 7 percent.
(That the accounting was wrong is almost irrelevant to the
argument, but it's a nice cherry on top of the fraud sundae.)
Now, as a matter of law, that isn't material? It's not
important in evaluating the stock? The irreversible slide
in Qwest shares that summer tells the truth: The market
convicted Nacchio, appropriately, long ago. Whether the
law can align itself with reality? Who knows?