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Nacchio trial: The defense


By Andy Vuong
Denver Post Staff Writer

Article Last Updated: 03/19/2007 09:34:47 AM MDT


(Post / Jeff Goertzen)

The stock trades were part of a sales program typical for many company executives.

Qwest's financial problems weren't unique because the company was dealing with an industrywide downturn.

The board of directors made him do it.

Those arguments could all be part of the game plan for former Qwest chief executive Joe Nacchio's defense against 42 counts of criminal insider trading.

They could come in addition to Nacchio's much touted national-security-related defense that, so far, has swallowed up enormous amounts of time in determining what will be allowed in open court during trial.

"They all trace out of the same core idea that the government can't show what was in his mind," said white-collar-crime expert Peter Henning, a professor at Wayne State University Law School in Detroit.

Nacchio goes on trial Monday in U.S. District Court in Denver on charges that he sold $100.8 million in Qwest stock in early 2001 while he had material, nonpublic information that Qwest's financial condition was faltering. He has pleaded not guilty. Each of the 42 counts carries a maximum penalty of 10 years in prison and a $1 million fine. If he is convicted on multiple counts, it's likely the prison sentences would be served concurrently.

Nacchio's attorney, Herbert Stern, declined to comment. Unlike many other insider-trading cases, the Department of Justice's charges against Nacchio aren't connected to a single event, such as a merger.

That bodes well for Nacchio, Henning said. "He has a better basis to try to dispute the government's claim that the reason why (he) traded was because (he) foresaw what was going to happen to the company," said Henning, a former Securities and Exchange Commission attorney.

"It's harder to do in other cases if you're talking about an event like a takeover or - back at the Imclone Systems case that caught up Martha Stewart - the FDA rejecting an application," he said. Qwest's stock price hovered around $35 to $40 a share from January 2001 to May 2001, which is the time period of the alleged illegal insider trading. The stock eventually plummeted to an all-time low of $1.11 a share in August 2002.


Credibility to be targeted

Nacchio's attorneys will start his defense by attacking the prosecution's witnesses during cross-examination, Henning said.

Those witnesses may include former Qwest chief financial officer Robin Szeliga and former president Afshin Mohebbi.

The defense could contend that the witnesses aren't credible because they cut deals with the government in exchange for their testimony. In

Inside the courtroom (CLICK TO ENLARGE)

Szeliga's case, she avoided a prison term by pleading guilty to one count of insider trading. Sources have said Mohebbi has received immunity from the government.

When the prosecution rests, observers say, Nacchio's attorneys may call witnesses to establish a number of defense positions:

Expert witnesses who can comment about market conditions in early 2001, which may support the contention that an industry downturn, and not any company-specific event, led to the decline in Qwest stock.

Former Qwest executives who haven't cut deals with the government, such as former chief financial officer Robert Woodruff, Szeliga's predecessor, to support Nacchio's contention the company was on firm footing.

Nacchio, if they want to present the argument that he alone believed the company was in line to receive hundreds of millions in contracts from top-secret agencies because of his talks with government officials.

"I would not be surprised one iota" if Woodruff testifies, said Lynn Turner, the chief accountant for the SEC from 1999 to 2001. "If Woodruff is on there for the defense group, then DOJ (the Department of Justice) better be worried, because now you've got a top-level CFO that was there for most of the time, who can come in there and testify right alongside Nacchio and say, 'Yeah, we did think things (were) going well."'

Woodruff worked as Qwest's CFO from 1996 to March 2001.

An attorney for Woodruff declined to comment.

"Woodruff was very close to Nacchio," said Turner, who now works for investment advisory firm Glass Lewis & Co.


Classified info an issue

During pretrial hearings and motions, much of the focus has been on Nacchio's national-security-related defense. Defense attorneys, prosecutors and a federal judge have worked on how the classified information that Nacchio contends he needs to use will be presented during trial. If Nacchio wants to disclose the information, he'll probably have to testify, experts say.

"If he's the only one who knew this, then he's the only one who can testify about it," Henning said. "If he wants the (classified) evidence, I would expect he's going to have to testify."

Nacchio also may argue that the board of directors instructed him to sell his shares. Before and during the period of trading in question, Qwest issued statements that said the board wanted Nacchio to reduce his holdings in the company.

In February 2001, the company issued a news release announcing that Nacchio would systematically sell 6.1 million shares over the next 28 months at the board's behest.

In the end, Nacchio may be acquitted simply because of the way the government has handled the case, Turner said.

"Being able to get the case done and prosecuted very timely helps when you're dealing with the jury," Turner said. "Here we are, a half-dozen years after it, and we're just now going to trial with this guy."

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