The Association of U S West Retirees



Nacchio may invoke national security defense
By David Voreacos, Bloomberg
Denver Post
Saturday, January 21, 2006

Joseph Nacchio, former chief executive officer of Qwest Communications International Inc., may invoke a government-secrets law normally used at terrorism and espionage trials to fight his insider-trading case, records show.

Prosecutors accused Nacchio on Dec. 20 of selling $101 million in Qwest stock in 2001 while knowing revenue targets were inflated.  Defense lawyer Herbert Stern told a judge that day that his defense may hinge on what Nacchio knew about Qwest's confidential "business relations" with the U.S. government.

Stern and prosecutors filed sealed court papers this week under the Classified Information Procedures Act (CIPA), which governs use of classified data at trials. Invoking the law in an insider trading case is rare and may prompt prosecutors to drop charges rather than let government secrets emerge at trial.

"Is it unusual?  Yes," said John Vandevelde, a Los Angeles lawyer who defended an FBI informant once suspected of being a Chinese double agent.  "Is it unreasonable or far-fetched?  I think not.  There may be all kinds of classified information in all kinds of cases that we may not have anticipated in earlier eras that defendants may be entitled to."  Stern's CIPA filing may be discussed today at a pre-trial hearing before U.S. District Judge Edward Nottingham in Denver.

Nacchio, 56, was the CEO at Qwest, the No. 4 local U.S. telephone company, from 1997 until his ouster in June 2002.  He denies wrongdoing and is free on $2 million bail.

Nacchio is accused of knowing that Qwest was struggling to meet aggressive financial targets when he sold shares.  He was not accused of any role in accounting manipulations that led Qwest to erase $2.5 billion in revenue.  He faces a civil lawsuit by the Securities and Exchange Commission that accuses him of directing an accounting fraud.

Stern, a retired federal judge, told Nottingham on Dec. 20 that the case was not simply a matter of "whether the projections that were given were accurate or not or whether he understood them to be different."  Rather, he said, Nacchio's knowledge of Qwest's income from the government is "at the core of this indictment."  Stern said he needs a U.S. security clearance to talk to Nacchio about the secret matters.

Nacchio played key roles in two industry panels that advised the U.S. government on national security issues.  He was vice chairman of the National Security Telecommunications Advisory Committee, which made recommendations on protecting the nation's communications network.

He also was chairman of the Network Reliability and Interoperability Council, which helped protect the nation's infrastructure "with a strong emphasis on national security," said a news release announcing his appointment in January 2002.

The CIPA was passed in 1980 and spells out how to introduce government secrets at trial.  The law was used in proceedings involving Zacarias Moussaoui, who pleaded guilty to conspiracy charges linked to the Sept. 11, 2001, terrorist attacks.

It was also used in by Wen Ho Lee, a former weapons designer once accused of spying for China, and Katrina Leung, a former FBI informant accused of espionage.  Lee pleaded guilty to mishandling government information.  Leung's charges were tossed out by a judge.  She pleaded guilty to lesser charges last year.

Under the CIPA, defense lawyers, prosecutors and court workers need government security clearances to review secret material.  Judges weigh its relevance and admissibility.  The Department of Justice appoints a "court security officer" to oversee handling and storing of documents in a secret room.

"There's probably a decent argument that Mr. Nacchio ought to at least get access to the information and show that it's relevant," said Vandevelde, Leung's attorney.

If a judge rules that secret evidence is admissible, the U.S. attorney general can order the judge to keep it under seal for national security reasons, said Andrew McCarthy, a former federal prosecutor.  He won a conviction of Sheik Omar Abdel Rahman in 1995 for plotting to blow up the United Nations, an FBI building, two tunnels, and a bridge in New York City.

Prosecutors know that ordering classified information to stay under seal could prompt a judge to drop charges or an entire indictment, said McCarthy, a senior fellow at the Foundation for the Defense of Democracy, a counter-terrorism think tank.

"You have a vigorous litigation so the issues get sharpened and everybody understands what the stakes are," McCarthy said.

"The defendant is forced to prove how important the information is to its case, and the government is forced to consider carefully how important it is to keep the information secret.

"The government knows the bottom line is they can stop the judge from declassifying information, but the price of hewing to that position could be that the court is going to dismiss counts or the entire indictment," he said.

Most of Qwest's revenue comes from the local-phone business of U S West, which Nacchio bought in 2000 for $44 billion using Qwest's soaring stock price.  The SEC alleged that Nacchio and other former Qwest executives inflated company shares to pay for U S West.

Qwest agreed in November to pay $400 million to settle some of the shareholder lawsuits it faced.  The company also agreed to pay $250 million to settle SEC fraud allegations.

Shares of Qwest rose 3 cents to $5.92 at 10:05 a.m. in New York Stock Exchange composite trading.  They have risen almost 5 percent this year.