The Association of U S West Retirees



New relevations about Nacchio's defense
Filings lend "some plausibility"
By Greg Griffin and Andy Vuong, Staff Writers
Denver Post
Sunday, January 21, 2007

A single phone call landed Qwest a top-secret contract in 1999 to install a fiber-optic line for the federal government.  There was no bidding.

Soon Qwest was doing business with four clandestine government agencies.  By early 2001, Qwest had been awarded more than $1 billion in classified work from just one of those agencies.

Then-chief executive Joe Nacchio was in discussions for additional black-book contracts worth hundreds of millions of dollars, including construction of a fiber-optic network to Europe and the Middle East.

That's how Nacchio describes his involvement in the clandestine world of classified government work in documents recently unsealed in his criminal insider-trading case.

The documents, filed between May and October and unsealed in December, have been redacted to shield classified information from public view.  But they still contain new information about Nacchio's defense against federal insider-trading charges.

It's difficult to know how much of what Nacchio describes, through his attorneys and a federal judge, is true.  Much of the information is sketchy.  Whether it was Nacchio or someone else on the phone in 1999, for example, isn't revealed.

Nacchio is charged with 42 counts of criminal insider trading related to his sale of $100.8 million in Qwest shares from January to May 2001.  Each count carries a maximum 10-year prison term.  Nacchio has pleaded not guilty.  The trial is scheduled to begin March 19.

The government contends the trades were illegal because Nacchio knew the company's financial prospects were in worse shape than the company had acknowledged.

Qwest suffered huge financial losses before Nacchio was forced out in mid-2002.  The phone company's stock fell from $64 in 2000 to $1.11 in August 2002, a drop in market capitalization of $91 billion.  The company later restated its revenues and earnings by $2.5 billion.

Nacchio's defense team asserts that he alone understood the company's prospects in early 2001, and that he believed they were positive.

"The classified information known to Mr. Nacchio during the time he traded allowed him to reasonably anticipate the award of classified government contracts," Nacchio attorneys Herbert Stern and John Richilano wrote in the May filing.  "Nacchio had ... observed the manner and frequency with which his classified discussions about potential new projects ultimately bore fruit as actual contracts."

Experts said the recently unsealed documents begin to flesh out what has until now been a mysterious defense strategy.

"It lends some plausibility to his defense, which otherwise might come across as almost laughable," said law professor and white-collar-crime specialist Peter J. Henning of Wayne State University in Detroit.  "He can make the claim that it was not unreasonable to be optimistic, even though he turned out to be wrong."

At least one top former defense official involved in government telecommunications contracts, though, disputes the notion that his agency handed out contracts without bids.

"We put contracts out and encouraged people to compete for business," said Lt. Gen. Harry Raduege, former director of the Department of Defense's Defense Information Systems Agency.  "To imply that I was going to give someone preferential treatment, or only meet with one person to discuss needs, that's totally inappropriate, and I never did anything like that."

Attorney Richilano declined to comment.

Other contentions

The new court filings reveal other contentions by Nacchio and his lawyers:

-  James F.X. Payne, former senior vice president of Qwest's Government Systems Division, emerges as a key figure in the case.  According to Nacchio's lawyers, Payne has verified the former CEO's contention that potential classified contracts were not included in Qwest's public statements about its prospects.

-  Nacchio had contract discussions with officials at DISA and at least two other agencies.

-  Nacchio believed that by helping the government move its covert communications to secure fiber-optic networks, he was directly involved in "cyber-warfare" with hostile foreign powers and rogue states. 

The prosecution's case against Nacchio is built, in large part, on warnings he received from other Qwest executives in late 2000 and early 2001 about looming financial problems -- a period during which Nacchio was selling big chunks of Qwest stock.  Former president Afshin Mohebbi and former chief financial officer Robin Szeliga both issued such warnings, according to court documents.

The government contends those warnings prove that when Nacchio sold the shares, he was aware of "material, nonpublic information" that would affect Qwest's stock price.

Nacchio's attorneys said in a document filed in May that the pending classified deals offset what he learned from the executives.

"We intend to prove that Mr. Nacchio's knowledge was not shared with any of the Qwest employees alleged to have given him 'warnings,"' they wrote.  "Nacchio reasonably believed that those criticizing the guidance (to Wall Street on Qwest's prospects) were mistaken, and that Qwest's public guidance remained accurate, if not actually low."

A $430 million contract

Qwest launched its government division in Washington in February 1998.  Two months later, Qwest announced it had won a 10-year, $430 million contract with an unnamed agency of the federal government.

Dean Wandry, senior vice president of government markets for Qwest at the time, told The Denver Post last week that "a great bulk" of the division's work was classified.

"I can't speak for what (Nacchio) knew or what he thought.  I was there in 1998 and 1999," Wandry said.  "It's classified information.  Not 100 percent, but a great bulk of it."

Wandry, 66, said he has been contacted by attorneys in the case but does not yet know whether he will testify.

The government has interviewed Payne, Wandry's successor, and was ordered by U.S. District Judge Edward Nottingham in October to give Nacchio's attorneys permission to speak to him.

Payne, 55, told prosecutors in a November 2005 interview that he worked directly with Nacchio on potential classified contracts, which were given code names such as "Ferrari," according to an open-court record filed by Nacchio's attorneys in May.

Payne said he did not include such potential contracts in his financial reports until they came to fruition because he regarded them as speculative.

One expert said Payne could be a critical witness for Nacchio.  "Payne's important," said former federal prosecutor William Mitchelson.  "Whether or not these ... estimates included these potential secret contracts is important to whether Nacchio knew something that no one else knew."

Payne left Qwest in May 2005 and now works for San Francisco-based government contractor Bechtel.  He did not return a call for comment.

Payne introduced Nacchio to Raduege, commander of DISA, according to Nacchio's May filing unsealed last month.

The Defense agency had already awarded Qwest $500 million in contracts at the time.

Nacchio had a series of meetings with Raduege from mid- 2000 to spring of 2001 in which the commander inquired about how Qwest could help make the Pentagon less susceptible to attacks from hackers.

An Oct. 24 order by Nottingham, part of which was unsealed in December, provides more details of Nacchio's dealings with secret government agencies.

"As he relates the chronology, Qwest's classified contracts and contacts commenced with an award by one of the agencies and thereafter blossomed into prospects for classified work from the other agencies after Qwest's initial work proved successful," Nottingham wrote.  "Those contracts were, according to him, awarded swiftly by reallocating already-appropriated funds from one account to another and did not go through a lengthy appropriations or bidding process."

It's unclear whether Nacchio's national-security strategy will pay off.  Experts agree it's a novel defense not used before in an insider-trading case.

"It's a clever strategy," Mitchelson said.  "It'll be interesting to see whether he gave some indication to his other corporate officers about whether or not he expected new contracts from some force that he couldn't discuss."

But another white-collar-criminal expert was skeptical.

"The question for the jury is whether he knew material, nonpublic information that might affect the market in the short run, when he sold the stock," said Columbia University law professor John Coffee.  "The fact that he had information that would offset that in the long term, that doesn't seem to me to be a defense."

Staff writer Greg Griffin can be reached at 303-954-1241 or