Ex-Qwest Chief Nacchio Loses Bid for Reduced Sentence

Bloomberg-Business Week

By Joel Rosenblatt

June 24, 2010

June 24 (Bloomberg) -- Joseph Nacchio, the former chief of Qwest Communications International Inc., lost a bid to reduce his insider trading sentence by almost half after a judge heard arguments on how much he gained from his crime.

U.S. District Judge Marcia Krieger in Denver said today that Nacchio, who had been sentenced to six years in prison, must serve 70 months. She upheld a $19 million fine -- the maximum Nacchio faced -- and approved forfeiture of $44.6 million, a figure the Nacchio and the government had agreed on. He was originally ordered to forfeit $52 million.

Nacchio, 61, of Rumson, New Jersey, was convicted in 2007 for illegally selling $52 million of stock in Denver-based Qwest in 2001 based on inside information. A federal appeals court last year ordered that he be resentenced because the trial judge incorrectly calculated his gains from stock sales. He has served almost 15 months.

Nacchio, over the objection of at least one Qwest officer he worked with, “refused to tell investors about the breakdown of revenue,” Krieger said at today’s hearing. Specifically, he withheld how much Qwest was relying on riskier, declining, non- recurring sources of revenue, she said.

‘Assess the Risk’

”Mr. Nacchio knew what the risk was, he could assess the risk” as he sold more than $50 million in Qwest shares in 2001, Krieger said. “The public did not know.”

Krieger, who didn’t preside over the trial, heard from experts for the government and Nacchio who performed “event studies” purporting to determine the amount Nacchio made from inside information by measuring how investors reacted to certain disclosures on particular days.

Krieger said she found the government’s expert, finance professor Anjan Thakor, “more persuasive” because he used a “macro approach” relying on more events that covered a longer time span. Thakor, of Wasington University in St. Louis, concluded Nacchio had made $23 million to $32 million traceable to insider trading, Krieger said. She used that amount to determine her new sentence.

The analysis of Nacchio’s expert, law professor Daniel Fischel, was “constrained” and “underestimates the effect of the information on the market,” Krieger said, because he relied on a narrow definition of insider trading and based his report on fewer events over a shorter time.

Illegal Gains

The U.S. argued Nacchio’s illegal gains came to more than $32 million, warranting the $19 million fine and a prison sentence ranging from five years and three months to six-and-a- half years.

Nacchio’s lawyer, Sean Berkowitz, suggested today that a sentence of three-and-a-half to four-and-a-half years would be adequate. He objected to the $19 million fine, saying “something in the several million dollar category” would be enough.

Insider trading cases typically involve defendants who traded on information that is “self evidently” critical to investors, such as an undisclosed, pending merger, Berkowitz said. Nacchio is the first executive ever prosecuted for trading on undisclosed internal predictions about “perceived risks” to future financial results, he told the court.

‘Average Guy’

In court filings and at the hearing today, Berkowitz used personal descriptions of Nacchio in appealing for a reduced sentence. Nacchio is an ”average guy” and a “straight shooter,” according to the filings. He is also ambitious and hard working, the filings said, citing the example of Nacchio’s running shoes coming apart during a marathon and his finishing the remaining 6.2 miles of the race “essentially shoeless.”

Berkowitz declined to comment after today’s hearing.

“No one wants to invest in a rigged game,” Assistant U.S. Attorney James Hearty told Krieger at today’s hearing. Nacchio’s violations represent “the most aggravated type of insider trading cases,” he said. “Mr. Nacchio controlled Qwest and he created the situation that’s at issue here.”

The case is U.S. v. Nacchio, 1:05-cr-00545, U.S. District Court, District of Colorado (Denver).

--Editor: Fred Strasser, Peter Blumberg

Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net.