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Nacchio could point to board's actions
By Andy Vuong, Staff Writer
Denver Post
Sunday, January 8, 2006 Right-click here to download pictures. To help protect your privacy, Outlook prevented automatic download of this picture from the Internet.

Right-click here to download pictures. To help protect your privacy, Outlook prevented automatic download of this picture from the Internet.Former Qwest chief executive Joe Nacchio -- accused of criminal insider trading for selling $100.8 million worth of Qwest stock in 2001 -- may have a simple yet powerful defense for the sales:  The board made him do it.

Qwest publicly stated on several occasions between September 2000 and February 2001 that its board of directors had ordered Nacchio to unload millions' worth of company shares.

Legal experts say the board's actions and company statements at the time could be vital to Nacchio's defense.

"He would argue that what he was doing was with full knowledge and authorization of the board," said Douglas McNabb, senior principal of McNabb Associates, a Washington, D.C.-based criminal defense law firm not involved in the Nacchio case.  "That's huge."

Federal prosecutors are expected to argue that even if Nacchio was told to unload Qwest stock, the 42 stock sales he made between January and May 2001 were illegal because he was aware of key information about the company's financial condition that wasn't publicly available.

They likely will also assert that Nacchio accelerated his stock sales instead of following the board's order to systematically divest his position.  To obtain a conviction, prosecutors would have to convince a jury beyond a reasonable doubt that Nacchio dumped stock while he knew Qwest's financial condition was much weaker than he claimed publicly.

Nacchio, of Mendham, N.J., has pleaded not guilty.  A discovery hearing -- where the prosecution and defense may disclose to each other additional details about their cases -- is scheduled for Jan. 20.

The stakes are high for both sides as the case unfolds.

For the Justice Department, the Nacchio prosecution is the culmination of a sweeping probe of Qwest that has spanned four years.

If convicted, Nacchio faces up to 10 years in prison and a $1 million fine on each of the 42 counts against him.  The government is also seeking the $100.8 million Nacchio grossed on the stock sales -- plus other fines.

The dollar amount and number of counts against Nacchio make it one of the single largest criminal insider-trading cases.

Federal prosecutors and Nacchio's defense attorneys declined comment for this story.

Nacchio stopped selling

In August 2000, after Qwest had acquired Denver-based Baby Bell US West, Nacchio exercised 550,000 stock options at $5.50 apiece and sold the shares at prices ranging from $49.05 to $53.34.

In September 2000, when those sales were disclosed publicly, a company spokesman said that the Qwest board had directed Nacchio to sell some of his shares every quarter because it didn't want his ownership stake to get too large.

"Joe has no choice -- he is required to sell a portion of his position," Tyler Gronbach, Qwest's spokesman at the time, said in a Denver Post article on Sept. 15, 2000.

Nacchio held 18 million stock options throughout 2000.

Gronbach, who left Qwest last October to work for R.H. Donnelley Corp. in Cary, N.C., did not return calls for comment.

The Denver Post last week asked Qwest for minutes of board meetings that would shed light on Nacchio's stock sales.  The company declined but gave this statement:  "We continue in our efforts to cooperate with the government in connection with the investigation."

In February 2001, the company issued a news release announcing a program in which Nacchio would systematically sell 6.1 million shares over the next 28 months at the board's behest.

Under the program, Nacchio was to exercise and sell 11,500 stock options daily from Feb. 20, 2001, to June 30, 2003, the date when the stock options would have expired.  He was to sell the stock regardless of its price.

"The Qwest board asked Nacchio to commit to the program to avoid the bunching of sales during and at the end of the exercise period," according to the Feb. 16, 2001, news release.

Experts say such programs are a common way for insiders to sell stock systematically without raising concerns on Wall Street and among the investing public.

On eight trading days, Nacchio exercised 11,500 stock options each day at a price of $5.50 apiece and sold those shares at a price ranging from $34.84 to $38.12.  However, he scrapped the sales program two weeks after it was announced -- reportedly because Qwest's stock was slipping below $35.

"I will not continue to sell shares daily at these prices given the current uncertainty in the markets," Nacchio said in a statement on March 2, 2001.

Nacchio's statements and actions in this period are critical.

Between Jan. 2, 2001, and May 29, 2001, the government alleges, Nacchio committed illegal insider trading by selling more than 2.5 million Qwest shares for $100.8 million while he knew the company's financial condition was weaker than disclosed.

Insiders at public companies -- such as Nacchio at Qwest during that time -- are required to sign Securities and Exchange Commission disclosures that they knew of no "material adverse information" about the company when selling stock.

Nacchio was forced out of Qwest in June 2002 as the company's deteriorating financial condition became known.  Qwest stock traded as low as $1.11 in August 2002.  It was later forced to restate $2.5 billion in revenues.

What he knew is critical

The board's mandate to Nacchio to sell shares is "a good fact for the defense," said Jay Brown, a former Securities and Exchange attorney and law professor at the University of Denver.

Brown added that Nacchio can still be convicted for insider trading on stock sales made under the board's mandate if he had knowledge of material, nonpublic information at the time.

"Certainly the defense would use any information that tends to negate Nacchio's intent to commit any wrongful activity," said Eric Yaffe, a former federal prosecutor now in private practice with Gray Plant Mooty in Washington, D.C.

"But the question is, are there other issues or factors and other evidence of which the government is aware of" that would counteract the information, Yaffe said.

Former Qwest chief financial officer Robin Szeliga has pleaded guilty to one count of illegal insider trading and agreed to help with the prosecution's case against Nacchio.

The government charged Szeliga with illegal insider trading for an April 30, 2001, stock sale in which she sold 10,000 Qwest shares at $41 a share.  On the same day, Nacchio sold 110,000 shares for $41.12, a transaction cited in his criminal indictment.

Last month, former Qwest executive vice president Marc Weisberg reached a plea deal on one charge of wire fraud and agreed to cooperate with prosecutors.

Former Qwest president Afshin Mohebbi also may testify for the government.

In October 2004, Qwest agreed to pay $250 million to settle SEC charges alleging financial fraud.  In November 2005, the company agreed to pay $400 million to settle a class-action shareholder lawsuit.

No past or present Qwest board member has been charged as part of the federal government's probe into Qwest.

Several former board members who served during Nacchio's tenure didn't return calls seeking comment.

Staff writer Andy Vuong can be reached at 303-820-1209 or