Qwest exec alerted Nacchio to revenue 'problems' before '01
By Jeff Smith, Rocky Mountain News
Tuesday, January 24, 2006
Qwest's president warned then-CEO Joe Nacchio by January
2001 about the "big problems" the Denver telco faced if it
couldn't "crank up" its business, according to court
documents unsealed Monday. Former President and Chief
Operating Officer Afshin Mohebbi made the warning in writing
to Nacchio and then reflected on what he told Nacchio in
person around that time in an e-mail to finance executive
"I told him we have done a great job of doing the one-time
things and that cannot continue," Mohebbi wrote to Szeliga
on Jan. 2, 2001. "We need the recurring to take off big
time by the end of first quarter or we are screwed."
Recurring refers to revenue that is ongoing from quarter to
quarter, such as the company's local telephone business, in
contrast to one-time sales of fiber-optic capacity or
Nacchio faces 42 insider-trading charges in connection with
selling more than $100 million of Qwest stock in the first
five months of 2001. He has pleaded not guilty.
The documents filed in U.S. District Court in Colorado are
possibly some of the strongest pieces of evidence that
Nacchio was told by early 2001 that Qwest's business was
The documents also indicate there were more specific
discussions with Nacchio on Jan. 3, 2001, and confirm
Mohebbi likely will be a key prosecution witness in the
government's insider-trading case against Nacchio.
Of course, Nacchio could have a different recollection of
his communications with Mohebbi, and the significance of the
information likely will be countered by Nacchio's defense
team if the case goes to trial.
Nacchio's lead attorney, Herbert Stern, didn't return a call
Prosecutors allege Nacchio accelerated his stock sales while
in possession of "material" information about how the
company was relying on questionable one-time deals to fill
significant gaps in its revenue targets.
The magnitude of those deals wasn't disclosed to investors
until analysts grew increasingly skeptical of the company's
numbers in the summer of 2001.
Qwest was still reporting double-digit revenue growth during
its first two quarters of 2001 while other
telecommunications companies across the country were
weakening. The telco eventually erased $2.5 billion of
revenue from its 2000 and 2001 books.
Nacchio has indicated he wants to use a government-secrets
defense, arguing he was optimistic about Qwest's financial
condition and prospects because of classified information he
possessed. Nacchio was privvy to government secrets while
serving on two top federal telecommunications advisory
The Mohebbi correspondence was included in recent court
filings in which U.S. Attorney for Colorado William Leone
argued classified information is "wholly irrelevant" to the
case because only about 1.5 percent of Qwest's revenues
resulted from federal contracts and classified contracts
were only a "small subset" of that number.
Furthermore, prosecutors argued all federal contracts --
whether classified or unclassified -- were included in
Qwest's forecasts, with classified projects protected by
code names such as Ferrari.
The government unit, "like almost every other Qwest business
unit, was performing worse than expected, falling short of
its plan by as much as $18 million for 2001" at the time
Nacchio was selling the stock, prosecutors allege.
Even if Qwest had significant prospects for getting
classified government work, "the defendant would still be
under a duty to disclose or abstain (from selling stock),"
Nacchio's defense team said in an unsealed court filing that
Nacchio's state of mind will be a "critical aspect" of the
"Mr. Nacchio, because of his participation in some of the
highest councils of government, was aware not just of secret
government contracts which had already been awarded to
Qwest, but also of well-formed plans for the government's
future business dealings with the company."
His attorneys also argue the government must prove Qwest's
financial figures were deliberately false. The government
maintains it doesn't have to prove accounting fraud to make
the insider-trading claims stick.
The government has started the process to provide
preliminary national security clearance to some of Nacchio's
attorneys so they can debrief Nacchio.
But prosecutors argue a "full-blown" use of the so-called
Classified Information Procedures Act is unnecessary because
"the government does not believe that it will ever be
necessary to refer to classified information during the
course of this case."
Legal experts say the government-secrets strategy could be
effective in giving Nacchio grounds for appeal if he is
convicted and the jury wasn't allowed to hear certain
Steps to obtain preliminary national security clearance
include completing a security questionnaire and two
fingerprint cards, and undergoing a background check by the
If Nacchio's defense attorneys clear those hurdles, they
would receive a security briefing and space to work within a
secure facility in Denver.
Sounding the alarm
• Afshin Mohebbi's
memorandum to Joe Nacchio (sometime before Jan. 2, 2001):
Mohebbi expressed concerns about Qwest's ability to meet
revenue projections of $5.1 billion for the firstquarter of
2001, saying the telco would need to book $580 million of
one-time deals. "It's doable but if we don't crank up
recurring(ongoing revenue) growth by April, we got big
• Mohebbi's e-mail on
Jan. 2, 2001, to finance executive Robin Szeliga:
"Remember the discussion I had with Joe. . . .We need the
recurring (revenues) to take off big time by the end of
first quarter or we are screwed."