The Association of U S West Retirees



Picking up the tab
Defending Nacchio, other execs already has cost Qwest $1 billion
By Jeff Smith
Rocky Mountain News
Friday, March 16, 2007

Qwest Communications has blown through more than $1 billion since 2002 defending itself and its former officers and directors from civil and criminal fraud allegations.  Some of those expenses, including various settlements, have been reimbursed by insurance carriers.  But even on that score, the Denver telco has taken a big hit and today could be forking over money from its coffers to defend former CEO Joe Nacchio and pay his expenses during his upcoming insider-trading trial.

Insurance carriers moved to cancel coverage in late 2002, claiming Qwest had filed applications based on false or misleading financial statements.  Qwest at the time was in the process of erasing revenue from its 2000 and 2001 books.

In a mediated settlement, Qwest agreed to pay $157.5 million to salvage $350 million worth of liability coverage for directors, officers and the employee benefit plans.

Nacchio's legal fees have at least been partly paid by insurance since then.  Qwest CEO Dick Notebaert said as much at the company's 2005 annual stockholders meeting.

For example, Nacchio's attorney, Herbert Stern, said recently that Nacchio's $1.5 million settlement with the California State Teachers' Retirement System came out of insurance money.

Qwest wouldn't comment about whether any insurance money is left or eligible to cover Nacchio's expenses now.  Such insurance policies have become narrower in their coverage, and some don't cover criminal allegations, said Texas attorney Michael Sean Quinn.

Quinn, who examined some of Qwest's regulatory filings, said the insurance proceeds could be depleted because of the civil settlements.

That would mean Qwest would be left footing Nacchio's bill.

Corporations, to attract top talent, typically agree to "indemnify" executives.  Qwest's bylaws require it to advance legal fees to officers involved in civil or criminal proceedings.  Nacchio's June 2002 severance agreement included a provision requiring Qwest to continue indemnification.

That could make for some interesting expense statements for Qwest to pay during Nacchio's trial starting Monday.  Nacchio and most of his defense team will be flying from New Jersey each week for a trial that will run four days a week and up to eight weeks in all.

That's a lot of airplane tickets, hotel or rental expenses, restaurant bills, and the like.

An insurer or company typically would pay "reasonable expenses" and the rest would be negotiated, Quinn said.  But what might be reasonable to an assistant vice president is different than what's reasonable to a former chief executive, he said.

Clearly, Nacchio already is paying top dollar to Stern, a former federal judge and prosecutor who has an almost legendary record.  If other corporate fraud cases are an indication, Nacchio's criminal defense likely is costing tens of millions of dollars.

Nacchio and his team may get a free pass to stay in luxury accommodations and eat at some of Denver's finest restaurants.

"I don't think the company is going to make an issue of it," Quinn said.  "He's been staying at nice hotels for years.  Unless the company is going broke, they're not going to regard that as crucial.  A $100 bottle of wine here and there -- no one is going to bitch about that.  Insurance companies would bitch like crazy."

Quinn said expenses usually aren't the biggest problem anyway.  A larger issue, he said, is that lawyers are "prone to exaggerating hours" or being poor record keepers.

Barring litigation over Nacchio's legal fees and expenses, Qwest shareholders may never know the final amount the company has paid.

Qwest spokesman Bob Toevs said "there's no plans at this time to call out those expenses in our reporting."  The company does have the right to go after certain expenses if Nacchio is convicted.

The lack of transparency irks Nelson Phelps, executive director of the Association of U S West Retirees.

"It seems like there should be some honesty upfront as far as sharing what the expenses are . . . (but) we consistently have trouble getting information (from Qwest).  It's an ongoing fight for us," Phelps said.

Phelps said retirees would be upset to know Qwest might foot the bill for expensive restaurants and pricey accommodations for Nacchio's defense team.

"That's the type of stuff that really irritates you."

The bill

Qwest Communications has spent more than $1 billion since 2002 defending itself and former officers and directors from civil and criminal litigation. Here are some of the biggest expenses:

  Class-action securities fraud settlement

(Arthur Andersen paid $10 million)

Figures in millions $390

  SEC settlement of fraud allegations

Figures in millions 250

  Payment to salvage directors, officers and employee benefits insurance coverage

Figures in millions 158

  Class-action settlement for failing to pay dividend after merger with U S West

Figures in millions 50

  Joe Nacchio's criminal defense

Tens of millions

  Securities fraud settlement with California State Teachers' Retirement System (Shared by Qwest and investment banks)

Figures in millions 47

  Class-action settlement related to Qwest's alleged mishandling of its employee savings and investment plan

Figures in millions 38

  Settlement of allegations that Qwest executives and directors breached their fiduciary duty

Figures in millions 25

  Class-action settlement related to fraud allegations at the European joint venture KPNQwest ($5.5 million in cash, $5.5 million in stock)

Figures in millions 11

  Note: In addition to this big-ticket list, Qwest has spent hundreds of millions of dollars in other litigation expenses since 2002 in connection with lawsuits, investigations and defenses of former executives and directors.  For example, Qwest paid the legal expenses of two midlevel executives acquitted of conspiracy and fraud in 2004 and has been paying for Nacchio's defense against civil-fraud lawsuits.

The total: $1 billion

The trial

The trial of former Qwest CEO Joe Nacchio starts Monday in Denver with jury selection.  Opening statements are expected Tuesday or Wednesday.  Nacchio faces 42 counts in connection with selling $100.8 million of Qwest stock in the first five months of 2001. or 303-954-5155,2777,DRMN_23910_5421187,00.html