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She raised red flag often, ex-CFO Szeliga testifies
Year passed before Nacchio lowered revenue outlook
By Sara Burnett
Rocky Mountain News
Tuesday, March 27, 2007

Former Qwest Chief Financial Officer Robin Szeliga warned Joe Nacchio repeatedly in late 2000 and early 2001 that the company would have trouble meeting its 2001 revenue projections, Szeliga testified at the CEO's insider-trading trial Monday.  The warnings started in September 2000 and included "a lengthy argument" that lasted until almost 3 a.m. one day in June 2001, she said.

But it wasn't until Sept. 10, 2001 -- more than a year after Szeliga first raised a red flag -- that Nacchio lowered the guidance to Wall Street, from the earlier range of $21.3 to $21.7 billion to a new target of $20.5 billion.

In the meantime, prosecutors say, Nacchio was selling his stock at a pace faster than ever before, grossing nearly $101 million between January and May 2001.

Nacchio believed the company could meet its aggressive targets, defense attorney Herbert Stern said, noting that under Nacchio the company met projections for 17 consecutive quarters -- including the first two quarters of 2001.

Szeliga testified for more than five hours Monday under a plea deal with prosecutors and is expected to resume her testimony this morning.

Szeliga said Qwest's revenues weren't sustainable and that in meeting after meeting, department heads showed Nacchio their numbers and told him as much.  Among the problems, she said, was an over-reliance on large, one-time sales of space on Qwest's fiber-optic network.

"The plan was very risky," Szeliga said.

She admitted that during an earnings call with analysts following the close of the first quarter she "omitted important information" about the one-time sales.

Prior to that call, she testified, Nacchio told her, "Stick to the script;  I'll answer the questions."

Their late-night argument came two months later as they prepared to address investors regarding a Wall Street Journal article that had caused Qwest and other telco stocks to drop.  Szeliga, who was visiting her parents in Pennsylvania, said she urged Nacchio via telephone not to restate second-quarter or year-end 2001 targets because she wasn't comfortable with them.

As the time on the East Coast approached 3 a.m., she said, Nacchio told her, "Just hang up and get some sleep.  You'll see what I decide in the morning."

Later that day, Nacchio again confirmed the targets.

Szeliga pleaded guilty in July 2005 to one count of insider trading, for selling 10,000 shares in April 2001.  She used the $125,000 profit to remodel her house, she testified.

Insider trading carries a maximum punishment of 10 years in prison, plus a $1 million fine and restitution.  But under Szeliga's plea deal -- in which she agreed to cooperate with the government -- she was sentenced to six months of house arrest and two years of probation.  She also was ordered to pay a fine of $250,000 and pay back the $125,000 stock profit.

Stern grilled Szeliga on the deal, saying she must have been "very concerned" about what could happen to her and asking whether she had been "interested in" testifying against Nacchio.

"I was only interested in avoiding incarceration by telling the truth and getting this behind me," Szeliga replied.  "Not interested in becoming a witness in this trial."

The day's highlights

  Robin Szeliga, Qwest's former chief financial officer, spent more than five hours on the witness stand Monday.  Szeliga testified that she pleaded guilty to one felony count of insider trading in connection with a stock sale (on April 30, 2001) because she possessed nonpublic, material information.

  Szeliga said she omitted "some important information" during the first-quarter 2001 earnings call with analysts and investors.  "The comments I made were truthful, I omitted some important information," Szeliga said.  "I omitted to tell the investing public we were making the quarter with IRUs (one-time sales and swaps of network capacity) and the amount of those IRUs."

  Szeliga said Joe Nacchio told managers of Qwest's key business units to focus on meeting business targets, even as those managers told Nacchio they could not achieve those financial goals.

  Prosecutors played a video clip from a January 2001 all-employee meeting, in which Nacchio said:  "The most important thing we do is meet our numbers.  It's more important than any individual product, it's more important than any individual philosophy, it's more important than any individual cultural change we're making.  We stop everything else when we don't make the numbers."

  In June 2001, Szeliga argued with Nacchio until the middle of the night against reaffirming financial targets.  She was unsuccessful;  he confirmed the targets the next day.  Nacchio didn't lower financial targets until Sept. 10, 2001.

What they're saying

"But, irrespective of his motives, his poor management of one of Denver's largest employers destroyed lives. . . . Joe Nacchio is guilty, all right. Guilty of being a moron."  Tim Beyers, of Littleton, who blogs for The Motley Fool finance Web site

Up next

  The defense will continue its cross-examination this morning of former Qwest Chief Financial Officer Robin Szeliga.  She will be followed by the next prosecution witness. or 303-954-5314,2777,DRMN_23910_5444968,00.html