The Association of U S West Retirees



Nacchio's legal tab picked up
Bylaws require Qwest to pay for ex-CEO's defense
By Andy Vuong, Staff Writer
Denver Post
Friday, January 26, 2007

Joe Nacchio is getting the best defense Qwest can buy.

The Denver-based phone company is paying for Nacchio's multi million-dollar defense against civil and criminal charges, which include 42 counts of illegal insider trading.

Nacchio, Qwest's former chief executive and chairman, has pleaded not guilty, and his criminal trial is scheduled to start March 19.

His final legal tab could run from $25 million to $75 million for both civil and criminal cases, according to experts.  Former Enron CEO Jeff Skilling, who was convicted of fraud and conspiracy last year, reportedly rang up $65 million in legal fees.

Qwest's bylaws require it to "advance legal fees to current and former officers who may be involved" in any criminal or civil legal proceeding because of their work with the company, said spokesman Bob Toevs.

"If there is a finding against one of those former officers, the company does have the ability or the right to recover the fees that were advanced to the individual," Toevs said.

But Qwest would have to recover the fees through court action, and the company wouldn't get anything if Nacchio's finances are emptied by fines and other debts.

Nacchio faces up to 10 years in prison and a $1 million fine for each of the 42 insider-trading charges.  A separate Securities and Exchange Commission civil fraud lawsuit seeks his stock sale profits from 1999 to 2002 and bonuses.  Nacchio, who reaped $176.5 million in stock sales during the period covered by the SEC lawsuit, has denied any wrongdoing.

The requirement for Qwest to cover Nacchio's legal bill is also spelled out in his severance agreement.  Nacchio was forced out of Qwest in mid-2002.

Qwest shareholder and retiree Jaclyn Prokesh called the arrangement "outrageous."

"It's really sad that a public corporation like Qwest is going to end up having to pay for his legal expenses," said retiree Nelson Phelps, executive director of the Association of US West Retirees.  "It's a further hit against a company (through) legal costs for a person that many retirees look at as almost sinking the company."

Qwest, which acquired Baby Bell US West in 2000, hasn't disclosed how much it has spent or expects to spend on Nacchio's defense.  Some of the fees may be covered by so-called Directors and Officers liability insurance, which many public corporations including Qwest carry to help defend and settle lawsuits against key officials.

But the insurance typically doesn't cover criminal charges, said John Toothman, founder of The Devil's Advocate, a legal-fees consulting firm in Great Falls, Va.

The Justice Department's case alleges Nacchio sold $101 million in Qwest stock in early 2001 while he knew the company's finances were faltering.

Separately, the SEC has sued Nacchio and several other former Qwest executives, alleging that they fraudulently boosted revenues by $3 billion from 1999 to 2002.  Qwest later restated much of that revenue.

Nacchio has also been named in several shareholder lawsuits.

He is represented by two law firms:  Roseland, N.J.-based Stern & Kilcullen and Denver's Richilano & Gilligan.

Herbert Stern is Nacchio's lead attorney, and John Richilano is the top local attorney.  Six other attorneys from those two firms have entered appearances in the criminal case.

Costs add up

Toothman said the lead attorneys in the case could likely charge more than $500 an hour and their associates around $200 an hour.  The legal bill would also include fees for pollsters, expert witnesses, travel expenses and other costs.

One expert already has appeared in court filings on Nacchio's behalf.  Noted jury specialist Edward Bronson of California State University reviewed hundreds of newspaper articles and prepared a 62-page report supporting Nacchio's effort to move the trial to New Jersey, which was rejected.  Bronson has said that he is paid $125 an hour for his work.

"These are expensive litigations," said John Marquess, president of Legal Cost Control, a legal-fees consulting firm in New Jersey.  "These things could go as high as $60 million to $75 million to defend."

Since Qwest is paying fees in advance, Marquess said Nacchio has no reason to control costs.  Skilling shelled out $23 million from his own pocket for his attorney fees, his insurance covered $17 million and $25 million went unpaid, according to published reports.  Enron had filed bankruptcy by the time Skilling faced criminal charges.

"When it's your own money, you may care a bit," Marquess said.  "When it's not your own money, what's he care?"

Legal experts said large corporations such as Qwest need to offer officers and directors financial protection from lawsuits in order to hire them.

"It'd be hard to attract the kind of individuals that you need to run a public corporation without that type of indemnification," said John O'Dorisio, a Denver corporate attorney.

Recommended steps

Harvey Pitt, former chairman of the SEC, said companies should have their boards conduct an investigation into charges before advancing legal fees.  He also said they should have adequate protections in place to ensure that they'll be able to recover the fees.

"Unless there are satisfactory responses to these questions, I don't believe boards are justified in advancing expenses, even though they may legally be able to do so or even obligated to do so," said Pitt, who now heads business consulting firm Kalorama Partners.

Experts said companies rarely recover legal fees from former executives even if they are convicted, and shareholders ultimately foot the bill.

"There's a lot of hurdles to get that money back," Marquess said.

The company would have to stand in line behind court fines, debt holders such as mortgage companies and shareholders that file civil suits.

Experts said Qwest would have the ability to recover attorney fees from former Qwest chief financial officer Robin Szeliga, who pleaded guilty to one count of illegal insider trading.

But during her sentencing last year, Szeliga said she has faced "financial devastation."  She was fined $250,000 as part of her sentence.

Szeliga is the only other former top Qwest officer to have been charged criminally.  Former president Afshin Mohebbi and former CFO Robert Woodruff, who preceded Szeliga, are also named in the SEC suit.

Toevs said he couldn't comment about individual cases.

Staff writer Greg Griffin contributed to this report.

Staff writer Andy Vuong can be reached at 303-954-1209 or