Primer on basic securities fraud
Qwest debacle underscores failure to take investors' trust
By Rob Reuteman
Rocky Mountain News
Saturday, April 21, 2007
A day after 12 everyday jurors convicted Joe Nacchio on 19
counts of insider trading, I feel the need to circle back to
basics. Call this column Securities Fraud for Dummies.
In the late 1990s, fledgling Qwest decided to become a public
company, selling shares on the open market to fund its
coast-to-coast fiber-optic network. That was a good idea. The
reason companies "go public" is to tap into the seemingly
limitless reserves of investors who are invited to purchase the
shares that fund the expansion that creates more value for both
buyer and seller. It is the very foundation of capitalism.
But when a company decides to take the advantages that come from
using the public's money, responsibilities accompany the
opportunities, as they always do.
Capitalist markets rely on transparency. When I decide to
invest my money in a public company, I do so with the
expectation that the company will freely and fully share its
finances with me. Otherwise, I can't make an informed decision.
The Securities and Exchange Commission was created in 1933 to
make sure things stay on the up and up, but they can't see and
hear everything, certainly not before it happens. Sure, they
can come along after something happens and try to make it right,
as they are doing in the Nacchio case. If he had been acquitted
Thursday, rest assured the SEC would have come down on him like
a ton of bricks with the civil case it filed against him in
2005. Since he was convicted, the commission may back off.
It's like when O.J. was acquitted but subsequently was found
guilty in a civil case. If they're convinced you're guilty,
they're going to nail you, one way or the other.
SEC aside, another level of serious scrutiny kicks in when a
company goes public. Once shares are sold on the open market,
mega-financial service companies consider plying them to their
customers. They employ armies of investment analysts that
scrutinize companies in each segment of the economy, issuing
detailed reports on a company's inner workings and prospects.
Ultimately, they rate each company's shares as a buy, hold or
In 1996, the most influential analyst covering the
telecommunications sector was a man named Jack Grubman. As
telecom analyst for Salomon Smith Barney, he was the
highest-paid analyst ever at $20 million a year. Nicknamed the
Pied Piper of Wall Street, he was "the cheerleader who talked up
shaky telecom stocks long after they fell into fatal decline,"
as Fortune wrote. He could make or break a company with
his stock ratings, and he did. He was close friends with Bernie
Ebbers of WorldCom, now serving 25 years for accounting fraud.
And he is the man who recommended to Phil Anschutz that he hire
Joe Nacchio to take Qwest public.
On April 5, Anschutz testified for the defense in the Nacchio
"I was looking for someone who had the background and the
experience and the knowledge in the industry and, even though I
had never met Mr. Nacchio, I had read about and heard about
him," Anschutz testified. "He seemed to have the skills and the
background that would be very attractive to me."
In 1996, Anschutz traveled to Wall Street and met with the big
investment banking firms, including Salomon, as he contemplated
an initial public offering for Qwest.
"What I had said to them is, 'I have taken this about as far as
I know how to take it,' " he testified. "One of the responses
was 'you're going to need somebody to lead this company.' And
Nacchio's name came up in that conversation."
Prosecutor Cliff Stricklin: "The way you originally got in
contact with Mr. Nacchio and learned of him was through
discussions with an analyst, a Wall Street analyst, is that
Anschutz: "Yes, his name was Mr. Grubman."
Phil Anschutz doesn't make many mistakes. I once wrote a column
in July 1998 after Forbes ranked him the third-smartest
billionaire in the world, behind Bill Gates and Saudi Prince
Alsaud. He even called me up and thanked me. But hiring
Nacchio may well go down as the biggest mistake he ever made,
far worse than teaming up with author Clive Cussler to film his
book Sahara. The blowup over that money-loser has
resulted in the other trial that will soon feature Anschutz'
Some will argue that Anschutz doesn't regret hiring Nacchio,
since he has made hundreds of millions of dollars selling stock
in the company he founded and Nacchio ran. I would argue that
an embarrassing lifelong link to Nacchio is more dear to him
than the money, partly because he has made so much more at other
At any rate, an April 2002 piece in Money magazine was
titled, "Is Jack Grubman the worst analyst ever?" An analysis
done by MarketPerform.com for the article concluded that if you
had acted on each of Grubman's buy ratings from February 1999,
and sold when he downgraded each stock, you would have suffered
a 74.5 percent loss. Indeed, then-New York Attorney General
Elliot Spitzer went after Grubman with a vengeance. First, he
charged that Grubman and Salomon Smith Barney had doled out
lucrative IPO stock in efforts to retain investment banking
relationships with the companies. In 2002, he alleged that five
telecom executives had improperly profited from IPOs. Among
those sued: Grubman, Nacchio and Anschutz.
Grubman agreed to a $15 million fine and a lifelong ban from the
securities industry. In 2003, Anschutz agreed to give $4.4
million to charities and nonprofits to settle, and Nacchio
agreed to give $400,000. Neither admitted to any improper
behavior. Anschutz officials have repeatedly said the
transactions were handled by others at The Anschutz Co., not
Spitzer's aggressive approach ultimately shamed the slow-footed
SEC into a more aggressive approach toward stock manipulation,
triggering its March 2005 civil case against Nacchio, among
On Tuesday, when the deliberating Nacchio jury asked Judge
Nottingham for the legal definition of material, I began
to think they were getting close to the heart of the case. In
order to convict Nacchio of insider trading, the jury had to
find that he sold Qwest stock on the basis of nonpublic,
"material" information with the intent to defraud.
Such information is material, the judge told them, if a
reasonable investor would consider it important in deciding
whether to act, as in buying or selling stock. Material
information may be a misstatement or an omission of facts, he
said. Prosecutors had argued that the material information
Nacchio had was that Qwest was relying too much on one-time
transactions to make its quarterly numbers that analysts
scrutinize when making their ratings. The deals were not enough
to sustain the 2001 revenues Qwest had projected to the
analysts, prosecutors argued. The house of cards was tumbling
down and unwitting investors took the fall while Nacchio
enriched himself. The jury found those actions to be criminal.
If investors can't believe they are able to profit fairly when
buying shares of public companies, they take their money
elsewhere. That's what happened. On a massive scale, burned
investors took what little money they had left in 2001 out of
the stock markets and put it into real estate. Crooks followed
them there, and it's our newest national nightmare. As the
recently deceased Kurt Vonnegut would say, "so it goes."
Business editor Rob Reuteman can be reached at 303-954-5177