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
He insists that Denver-based Qwest is on track to meet or
beat its double-digit revenue growth estimates for 2000 and
"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,"
The news release even uses the word
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
"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
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
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
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
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
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,
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
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
But Qwest didn't disclose how much revenue it had generated
from its controversial fiber-optic capacity deals until
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.