Ex-Telecom CEO Fields 'Black Box' Trial Defense
Qwest's Nacchio, to Fight Insider Trading Charge, Cites
By Dionne Searcey and Peter Lattman
The Wall Street Journal
Friday, March 16, 2007
Nearly five years after he left the former telecom highflier
Qwest Communications International Inc., Joseph Nacchio is set
to go on trial for insider trading. The government claims he
sold $100.8 million of Qwest stock in 2001 while knowing that
financial woes were mounting at the company he led as chief
executive. Jury selection starts Monday in Denver federal
But what seemed a straightforward insider-trading case now is
looking more like a spy saga. Mr. Nacchio, while acknowledging
he sold shares right before the stock plunged in 2001 amid poor
financial results, maintains that he actually was personally
upbeat about Qwest's prospects while he was cashing out.
His reason: He had classified information about big
national-security-related federal contracts that he thought
Qwest would win. These "black book" contracts, as they're known
in the industry, would have kept its results in line with
expectations, his lawyers say in pretrial filings.
There is evidence Mr. Nacchio had access to the highest levels
of government. To that point, court filings show that Mr.
Nacchio met in the White House with such high-level figures as
Condoleezza Rice and Richard Clarke in early 2001 about
telecom-related national-security issues. The defense may bring
up the meeting at the trial.
Government lawyers representing four clandestine agencies -- so
secret their names can't be mentioned in court -- have
aggressively fought the release of much of the classified
material sought by Mr. Nacchio. Prosecutors say the whole
national-security aspect of his defense is a smokescreen with no
The stakes are high for Mr. Nacchio, a charismatic and brash
telecom veteran now 57 years old. If convicted on many of the
42 insider-trading counts, he could conceivably face life in
prison. Legal experts say a maximum of 10 years would be more
likely, given how judges interpret sentencing guidelines in such
cases. He also could face forfeiture of nearly $101 million,
the value of the stock sold.
Other legal proceedings against Mr. Nacchio, including a
Securities and Exchange Commission civil fraud suit against him
and six other former Qwest executives, are on hold until after
The Nacchio criminal case is among the last of a string of
high-profile prosecutions of corporate brass brought earlier
this decade. It comes at a time when there's been a shift in
attitudes toward white-collar crime. Since the White House
formed a Corporate Fraud Task Force in July 2002 amid the Enron
Corp. and WorldCom Inc. debacles, some of the tough tactics used
by the Justice Department have come under criticism. In recent
months, the Justice Department has reinforced protections for
white-collar defendants that had been eroded.
"The Qwest investigation started in the whirlwind of the
corporate fraud cases," says Jacob Frenkel, a defense lawyer at
Shulman, Rogers, Gandal, Pordy & Ecker in Rockville, Md. "Now
the winds are changing."
Qwest sprang up in the mid-1990s, formed by railroad magnate
Philip Anschutz, who in 1997 put Mr. Nacchio in place as CEO to
take the business public. Qwest soon took over a Baby Bell, U S
West, and set out to build a fiber-optic network to carry
Internet traffic world-wide. But many others had the same idea,
spending billions to string fiber, and when demand didn't match
their dreams, the telecom bubble burst and start-ups hit hard
Amid their woes, they sometimes pumped up revenue by swapping
fiber-optic capacity and interpreting accounting rules so they
could recognize revenue for the capacity they swapped. Amid
exposure of this maneuver and the general telecom slump, Qwest
nearly slipped into bankruptcy court. Mr. Nacchio resigned in
2002 and the next year Qwest restated two years of results,
eliminating $2.48 billion of revenue for 2000 and 2001.
Mr. Nacchio was indicted in December 2005. The U.S. has had
mixed results in prior prosecutions of former Qwest executives.
It has charged six besides Mr. Nacchio with insider trading or
accounting-related crimes, and won plea deals from four, but
none got prison time. Those four are cooperating with
prosecutors in the Nacchio case. The two others were acquitted.
For Mr. Nacchio's case, everyone from attorneys to the judge to
a court reporter has had to get high-level security clearance.
The government has redacted pages of material Mr. Nacchio wants
to present. Some are so heavily censored they look blank.
Before reviewing classified materials, Mr. Nacchio and his
lawyers must ask the judge for permission, a process that has
essentially revealed the defense's strategy. To prepare and
review court filings, he and his New Jersey-based lawyers have
repeatedly traveled to Washington to review classified
information in a Sensitive Compartmented Information Facility,
These facilities are generally steel-lined and protected with
copper foil and other materials to block transmissions. Mr.
Nacchio's is a nondescript conference room in the Department of
Homeland Security, where lawyers must check their computers and
phones at the door. They must draft any legal briefs concerning
the classified material on an old government-issued laptop and
hand them over to a security officer, who files the pleading
under seal. When the prosecution files response papers, the
defense team has to travel back to the SCIF in Washington, or
another SCIF in Denver, to review them.
It's possible all the jostling over classified material could
end up amounting to pretrial gamesmanship. In the runup to the
recent perjury trial of former Dick Cheney aide I. Lewis Libby,
the parties fought over the use of classified documents. But
when the defense didn't put Mr. Libby on the stand, the judge
curtailed the use of the information.
Mr. Nacchio's lawyers have also raised more-traditional
defenses. Their filings say that what he knew about the
company's finances when he sold stock wasn't "material"
information requiring disclosure to investors. The defense also
is expected to argue that Mr. Nacchio sold stock for personal
reasons having nothing to do with any confidential information
He and his lawyers are navigating murky legal terrain outlined
in the Classified Information Procedures Act. That 1980 federal
law lays out procedures for courts and lawyers to follow to
access classified files. Congress enacted it after some
government officials had evaded prosecution by threatening to
reveal classified information at trial, a practice known as
Prosecutors have said in pretrial maneuvering that the
national-security elements of Mr. Nacchio's defense are a red
herring, in part because Qwest's revenue from government
contracts was too small to offset other problems Mr. Nacchio
knew were mounting at the company.
Moreover, prosecutors say any classified contracts Qwest was
working on would have been included in its reports and financial
projections under the broad category of government revenue. Mr.
Nacchio's court filings say he couldn't share his optimistic
outlook with his underlings because they didn't possess the same
security clearances. Information about whether the contracts
ever materialized is elusive; court hearings where that
information could have surfaced have all been closed. Mr.
Nacchio's state of mind -- which includes whether he believed
the contracts were coming -- is a crucial component to the
insider-trading charges, the judge has ruled.
Mr. Nacchio, a grandchild of Italian immigrants to New York, got
into telecommunications in 1970 with an engineering job at the
old American Telephone & Telegraph Co. He rose to chief
engineer and was part of a plan to upgrade AT&T's national
network with fiber optics. Eventually he became president of
the company's consumer unit, where he stood out for marketing a
popular pricing plan, before Mr. Anschutz hired him to lead
Mr. Nacchio helped catapult Qwest from an unknown private
business into a major phone company with the acquisition of U S
West. As he pitched his plan for a world-wide fiber network to
investors and potential customers, Mr. Nacchio also shopped it
Mr. Nacchio did obtain some government contracts for Qwest in
the late 1990s, according to defense filings. The filings say
Mr. Nacchio discussed Qwest's business -- including possible
contracts for secret equipment hubs and plans for classified
networks in the Middle East -- with key government officials.
If the government offered Qwest contracts along these lines,
evidence to this effect isn't in the public domain at this
In the first half of 2001 -- the period when Mr. Nacchio was
selling tens of millions of dollars of Qwest stock -- he was a
member of the President's National Security Telecommunications
Advisory Committee, a group of technology executives that
discussed security matters. He had security clearance and the
defense maintains that he learned through his membership that
the government wanted to shift its classified communications to
fiber networks to avert cyber-terrorism.
In March 2001, according to the defense, Mr. Nacchio met in the
White House situation room with Ms. Rice, then President Bush's
national-security adviser, and Mr. Clarke, then chief
counterterrorism adviser on the National Security Council. The
filing says Mr. Clarke asked if it was possible to create
telecom infrastructure for the government that wasn't connected
to any public networks, according to a defense filing.
"Nacchio responded that not only was it possible but that he had
already done it," says the filing, which consists of notes of a
federal investigator's interview with a former Qwest manager.
Mr. Nacchio "went on to describe how he would do it and there
was a debate on the subject," according to the notes.
At the time, in early 2001, Qwest's finances were floundering.
The telecom bubble was bursting, and Qwest had begun accounting
moves for which it later drastically restated income.
According to federal prosecutors, Mr. Nacchio had begun selling
stock in January 2001 even as another Qwest executive warned him
about the company's financial problems. Mr. Nacchio has said in
pretrial filings that he believed those warnings to be wrong
because he thought Qwest was in line to receive lucrative
government contracts that his fellow executives didn't know
In May 2001, Mr. Nacchio completed the stock selling that the
government labels insider trading. Two months later, at the
National Security Telecommunications Advisory Committee, Mr.
Nacchio was officially named vice chairman. A year later --
amid probes of Qwest's accounting and bleak financial results --
Qwest directors asked for and received his resignation as CEO.
In his criminal case, secret federal agencies have repeatedly
objected to handing over material to Mr. Nacchio, saying that to
do so would cause "exceptionally grave damage," according to the
trial judge's notations in one filing. One clandestine agency
argued that giving up the material would create "diplomatic
tensions which would adversely affect the nation's foreign
relations," the filing said.
Last August, the defense team was asked to leave a hearing while
representatives from one agency and the prosecution discussed
the material, according to a court transcript. During the
hearing, the federal judge in Denver, Edward Nottingham, became
frustrated with the government's demands for secrecy.
"I'm unhappy with this agency, very unhappy," said Judge
Nottingham, according to the transcript. "If it is so important
and so top secret and so critical why is it in here? Why am I
even looking at it?" He added: "That's the trouble with all of
these secret proceedings...everybody thinks there's a lot there
and there really isn't."
Because of the national-security angle, the case is being
watched closely in some Washington circles. Mr. Nacchio's
lawyers roiled government officials last year by alleging that
as Qwest's CEO, Mr. Nacchio had refused a government request for
access to Qwest's customer phone records.
The case is also attracting attention in Denver, Qwest's
hometown. Although the company is still operating, thousands of
employees lost their jobs and pension savings in the aftermath
of its sinking fortunes and cratering stock. Some locals have
vilified Mr. Nacchio, who even while heading the Denver company
kept his main residence in New Jersey. "He came into town on
his high horse telling everybody what he was going to do and
what happened obviously was the company went down the sewer,"
says Nelson Phelps, executive director of the Association of U S
West Retirees and a longtime critic of Mr. Nacchio.
Whether Mr. Nacchio will testify is unclear. The SEC civil
complaint describes him as having an "explosive temper" that
some legal experts say could hurt him on the witness stand. The
SEC filing, in federal court in Denver, quotes an executive as
saying, "People were just afraid of the man." Friends and
former co-workers say he was merely an aggressive and extremely
Mr. Nacchio is deeply involved in his own defense, poring over
documents and offering suggestions to his legal team, friends of
his say. The possibility of losing his liberty has taken a toll
on his health, they say, adding that Mr. Nacchio has sought
medical treatment for several stress-related health issues.
A devout Catholic, he has turned to his faith for solace, says a
onetime college roommate, David Miller. The trial is scheduled
to begin on the Feast of St. Joseph, a Catholic holiday that has
special resonance with Italians and for Mr. Nacchio, who shares
a name with the saint. Friends say Mr. Nacchio considers this a
Write to Dionne Searcey at
firstname.lastname@example.org and Peter Lattman at