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State of mind called key in Qwest case
By Greg Griffin, Staff Writer 
Denver Post
Sunday, February 4, 2007

ImClone Systems' Samuel Waksal urged his daughter to sell her stock right before bad news was announced -- then he lied to investigators.  He pleaded guilty and went to jail.

Former Worthington Foods director Roger Blackwell passed news of merger talks to associates and tried to hide the evidence, but his ex-wife turned on him.  A jury convicted him.

It may not be so easy to put away former Qwest chief executive Joe Nacchio, legal experts say.  He sold stock over a five-month period, and there may be no "smoking gun" tying those trades to his insider information.

"This is not a slam-dunk case.  They'll be asking the jury to draw a lot of inferences about why Joe Nacchio sold his stock," said law professor and white-collar-crime expert Peter Henning of Wayne State University in Detroit.  "What was he thinking when he made those trades?  That's what we're left to guess about."

Nacchio is accused of selling $100.8 million in Qwest shares from January to May 2001, when he allegedly knew the company's finances were deteriorating.  Prosecutors allege that Qwest didn't begin to disclose looming financial problems until it lowered its stock guidance in September 2001.

Nacchio faces 42 insider-trading counts, each of which carries a maximum 10-year prison term.  He has pleaded not guilty and is free on bond.  His trial is scheduled to begin March 19.

Qwest's shares fell from $38 in mid-May 2001, when Nacchio made his final stock sales, to $1.11 in August 2002.

Former Qwest chief financial officer Robin Szeliga and former Qwest president Afshin Mohebbi are expected to testify.

Szeliga told investigators she urged Nacchio to publicly disclose more information on the company's financial risk, according to court documents.  Mohebbi told investigators that he advised Nacchio more than once that he thought Qwest's earnings estimates were too high, according to filings.

Szeliga has pleaded guilty to one count of criminal insider trading for a trade she made in April 2001.  Mohebbi, who did not sell Qwest shares, may receive immunity for his testimony.

The Securities and Exchange Commission claims in a civil fraud case that Nacchio, Szeliga and former Qwest finance chief Robert Woodruff traded on insider information for total profits of $213 million.

In the criminal case, Nacchio's attorneys claim the warnings he received were wrong because he alone knew that Qwest might receive lucrative, top-secret contracts from the federal government.

Another potential defense is that Nacchio made stock sales as part of a scheduled trading program, and that in some cases the Qwest board directed him to sell.

Harvey Pitt, who defended notorious inside-trader Ivan Boesky and later headed the SEC, said the government may benefit from the duration of Nacchio's trades.

"If there's trading over a longer period of time, that can potentially help prosecutors," he said.  "If someone didn't do this just once but on numerous occasions, that can make it more impressive."

Another strength for the prosecution is that Nacchio sold more than $100 million in stock, a large number that will make an impression on jurors.  The trades were at a noticeably faster pace than he had sold stock before.

What must be proved?

There were 24 people indicted on suspicion of criminal insider trading from October 2005 to October 2006, and 15 people were convicted, according to the U.S. Department of Justice.  Nacchio was charged in December 2005.

Prosecutors must prove not just that Nacchio possessed insider information, but that he used it when he sold his stock.

They also must prove that he acted "willfully and with the intent to defraud, manipulate or deceive," U.S. District Judge Edward Nottingham wrote in a filing.  A key issue may be whether Nacchio and his attorneys can convince jurors that he believed his actions were not improper.

"The prosecution is going to have to ask the jury to make inferential leaps of faith regarding Nacchio's state of mind regarding his securities trading," said Greg Goldberg, a white-collar-crime defense attorney with Holland & Hart in Denver.  "It can be done, but it's difficult."

Unlike some high-profile insider-trading cases, Nacchio's doesn't involve the quick succession of events occurring in minutes, hours or days that can help make circumstantial evidence credible to a jury.

"The more that the time between the receipt of information and the transaction grows, the less strong is the inference that the trading is because of the information," Henning said.

The case also appears to lack a coverup or the testimony of someone tipped by Nacchio with inside information -- in other words, the "smoking gun."

Comparable to Skilling's case

The closest comparison to Nacchio's case is that of Jeffrey Skilling, who was convicted in May on only one of 10 insider-trading charges.  The jury found the former Enron CEO guilty of fraud but was mostly unconvinced by prosecutors' contention that his $62 million in stock sales during a 17-month period was illegal.

On the one insider-trading count that stuck, prosecutors caught Skilling in what appeared to be a lie.

Skilling testified that he sold shares for $15.5 million on Sept. 17, 2001, because he was worried about the economy after the terrorist attacks six days earlier.  But the government produced a taped conversation with a stock broker in which Skilling had first attempted to sell the shares Sept. 6.

The lie or attempted coverup is often a prosecution linchpin:

Waksal, the former ImClone CEO, told investigators he didn't contact relatives and associates prior to their trades in December 2001.  But the government said phone records proved otherwise.  He pleaded guilty to securities fraud, bank fraud, conspiracy to obstruct justice and perjury.

Blackwell was convicted in June 2005 of tipping off friends and relatives in 1999 about Kellogg Co.'s unannounced, pending purchase of Worthington Foods.  He was a Worthington Foods director and Ohio State University professor at the time.  The case turned on the testimony of his ex-wife, who said the couple gave her mother money to buy Worthington shares and later destroyed evidence.

Boesky, the Wall Street financier who pleaded guilty to insider trading in 1986, testified in the 1990 trial of an associate that he had lied repeatedly to investigators.  Among other transactions, Boesky made $28 million trading on insider information when Nestle bought Carnation in 1984.  His cooperation helped prosecutors nail junk-bond trader Michael Milken.  Boesky was jailed for 22 months and fined $100 million.

"In other prominent insider-trading cases, defendants have been caught hands-down in a lie," Goldberg said.  "That's where others who've pled guilty or are cooperating with the government come into play.  They can testify as to what Nacchio said and did."

Craig Silverman, a former Denver chief deputy district attorney, said the challenges facing Nacchio's prosecutors aren't unusual.

"It's tough to reach into somebody's mind and pull out proof beyond a reasonable doubt that this is what this man was thinking.  But prosecutors do that all the time," he said.  "Every crime requires proof of the culpable mental state.  And you prove that circumstantially."

Three major insider-trading cases


Charged:  with civil and criminal securities fraud in November 1986.  Earned tens of millions of dollars buying and selling stock on inside information about forthcoming corporate transactions.

Pleaded:  guilty to one criminal count of conspiracy to commit securities fraud.  Helped the government convict junk-bond giant Michael Milken and others.

Key evidence:  paid an investment banker for stock tips with suitcases full of cash.

Sentenced:  to three years in prison but released on parole after 22 months.  Paid $100 million to settle civil charges.


Charged:  with 13 criminal counts, including securities fraud, conspiracy to commit securities fraud, obstruction, perjury and bank fraud in August 2002 as part of an insider-trading case.  The ImClone Systems CEO learned in December 2001 that the Food and Drug Administration rejected its experimental cancer drug.  He then tipped off at least one family member, who sold stock before the bad news was announced.

Pleaded:  guilty to eight counts.

Key evidence:  phone records to relatives and associates made immediately before stock sales and one day before announcement.

Sentenced:  in June 2003 to seven years and three months in prison and ordered to pay nearly $4.3 million.


Charged:  with 10 counts of insider trading as part of a larger fraud case.

Pleaded:  not guilty.  He was convicted in May of 18 counts of fraud and conspiracy and one insider-trading count.

Key evidence:  On the insider-trading count, prosecutors played an audiotape of Skilling's conversation with a stock broker that contradicted his sworn testimony explaining the trade.

Sentenced:  in October to 24 years and four months in prison.  He is appealing the sentence.

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