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Jury likely to hear Nacchio's own words
Ex-CEO insisted Qwest was doing well as price dove
By Jeff Smith, Rocky Mountain News
Thursday, December 22, 2005

It's Dec. 21, 2000.  Arapahoe County-based ICG Communications is bankrupt, and other telecommunications companies across the country are weakening.  Qwest stock has plummeted to $32 a share, half of its high of $66 nine months earlier.  Chief Executive Joe Nacchio comes out swinging.

He insists that Denver-based Qwest is on track to meet or beat its double-digit revenue growth estimates for 2000 and 2001.

"Qwest believes it is not having the same problems announced by several competitors because Qwest has newer assets, a lower cost position and a product line targeted to capitalize on the high-growth sectors of the industry," Nacchio declares.

The news release even uses the word declared.

By mid-January 2001, Qwest stock has rebounded to $45 a share, yet Nacchio still isn't satisfied.  He says he believes the stock is undervalued, and Qwest spends nearly $1 billion to buy back 22 million shares to strengthen the company's stock price.

But Nacchio isn't personally buying Qwest stock.

He is selling Qwest stock -- more than 500,000 shares for $21.6 million in January 2001 alone.

Today, Nacchio is facing 42 insider trading charges related to more than $100 million of stock sales in the first five months of 2001.

While the eight-page indictment returned Tuesday doesn't include the details above, this is the kind of juxtaposition of events prosecutors are likely to present to a jury should the case go to trial.

By December 2000, the indictment says, Nacchio possessed information that Qwest wasn't doing as well as what was being portrayed to investors.  By then, auditor Arthur Andersen also had warned Qwest's audit committee that some of its accounting practices were risky.

With this knowledge, Nacchio accelerated his sales of Qwest stock, according to prosecutors.

Nacchio has maintained his innocence, and, after posting a $2 million bond Tuesday, told reporters he looks forward to telling his side of the story.  His attorneys said they are confident he will be exonerated.

"It's true I earned significant compensation," Nacchio told a congressional panel investigating Qwest and Global Crossing in the fall of 2002.  But he said the options were granted in 1997 and he was making pragmatic personal finance decisions.

"I sold my shares based on the advice of financial advisers to diversify my holdings," he said.

The government's case may hinge on what prosecutors can prove Nacchio knew about specific deals.

For example, Qwest entered into a secret side deal with Cable & Wireless in December 2000 to salvage a more than $100 million transaction.

Nacchio announced that deal in a news release on Jan. 18, 2001, but can prosecutors prove he knew about the side agreement that changed the terms and invalidated the original accounting?

Former Qwest President Afshin Mohebbi and former top sales executive Gregory Casey are expected to be potential witnesses on some of those deals.

The case also will come down to jury sentiment, said Craig Silverman, a former Denver prosecutor.

"Most trials boil down to passion plays:  Which side does the jury like or dislike?" Silverman said.  "Even though this case involves a huge amount of money, lots of documents, it will all boil down to whether the jury really dislikes Nacchio and what he did."

In the first five months of 2001, Nacchio repeatedly touted Qwest's impressive growth rates while he sold hundreds of thousands of shares of stock, according to documents and records assembled by the Rocky Mountain News over the past three years.

He in turn demanded that employees meet the company's aggressive projections, instilling what the Securities and Exchange Commission characterized as a "culture of fear."

"The most important thing we do is meet our numbers," Nacchio said at an all-employees meeting in January 2001.  "It's more important than any individual product, it's more important than any individual philosophy, it's more important than any individual cultural change we're making.  We stop everything else when we don't make the numbers."

As he sold stock in January 2001, Nacchio was trumpeting the company's improvements in customer service, the Cable & Wireless contract and progress in re-entering long distance.  On Jan. 24, 2001, Qwest reported strong 2000 financial results.

In February 2001, the board's audit committee told Qwest management to provide more disclosure to investors about its sales and swaps of communications capacity, according to congressional testimony by audit committee member Peter Hellman.

By then, Qwest was relying heavily on those deals to make its financial projections.

Also by then, Arthur Andersen had classified the swap accounting -- in which Qwest booked revenue upfront from what essentially were capacity trades -- as "maximum risk," bordering on unacceptable.

Qwest, under Nacchio's successor, Dick Notebaert, would erase nearly $1 billion of swap revenue from its 2000 and 2001 books.

Nacchio continued to sell stock during February and March of 2001 while announcing new services and new contracts, including a $100 million deal to sell Internet equipment to Arizona schools.

The accounting of that deal eventually would be restated and become the subject of a criminal investigation.

By April 2001, a senior executive had proposed additional disclosure to investors, and Arthur Andersen's Mark Iwan raised concerns about some of Qwest's business transactions, including a $109 million capacity swap with Global Crossing.

But no investor disclosures about the swaps came on April 24, when Qwest announced its rosy first-quarter results.

"We have 12 percent revenue growth," Nacchio said in the earnings conference call with analysts, "two to three times the rate of anyone else in the industry.  We believe that it may be a little harder (to meet future revenue targets), we may have to work a little harder, but we will meet our numbers.  And I think that is what we get paid to do."

In an interview with Fox News on April 29, 2001, Nacchio attributed most of the company's growth to new products and taking market share from other companies.

Nacchio sold $30 million of stock between April 26 and 30, 2001.

Former Chief Financial Officer Robin Szeliga, who is expected to be one of the government's star witnesses, has pleaded guilty to insider trading for making a $125,000 profit from a stock sale on April 30, 2001.

On May 2, 2001, Nacchio defended his large compensation just before facing stockholders at the company's annual meeting.

"I should be allowed to make more than a second baseman (in baseball).  I create more economic value than they do," he told reporters.

The remark was in reference to the high salaries of baseball players, particularly the $252 million, 10-year contract of then-Texas Rangers shortstop Alex Rodriguez.

On May 10, 2001, panic ensued among Qwest's operational and sales ranks as an e-mail circulated that Szeliga wanted to put a lid on the big capacity swaps because she didn't want to have to disclose them to investors.

Three days later, Qwest's top sales executive Casey advised Mohebbi to "reset" downward the telco's revenue projections and "put the best face on to Wall Street that we can."

Nacchio was still selling stock.

He told the congressional panel that he placed a stop order at $38 a share.

"I never exercised my remaining options, roughly two-thirds of those I was granted from Qwest," Nacchio said.

On June 20, 2001, Morgan Stanley telecommunications analysts questioned Qwest's accounting decisions and "lack of visibility."

But Qwest didn't disclose how much revenue it had generated from its controversial fiber-optic capacity deals until August 2001.

Morgan Stanley issued another report, saying it had serious doubts Qwest could sustain its growth.

In an interview in November 2001, Nacchio was still angry, saying the Morgan Stanley analysts "aren't the sharpest knives in the drawer."

When asked whether Qwest was boosting revenue through aggressive accounting, Nacchio bristled, saying, "Well, analysts who believe that need to go back to school and learn accounting.  That's the craziest thing I've heard."

By then, however, Qwest was reporting flat revenues, and its stock was in a steep decline. It would wind up 2001 at $14.13 a share, after starting the year at more than $40.

http://www.rockymountainnews.com/drmn/tech/article/0,2777,DRMN_23910_4333814,00.html