Anschutz to testify today
Prosecutors made a strong case during 10 days of testimony that former Qwest CEO Joe Nacchio knew Qwest was in financial trouble when he sold $100.8 million in company shares from January to May 2001, according to legal experts. But it was light on evidence showing Nacchio's state of mind when he made the trades, an important piece of the case.
Critical to the government's insider-trading case against Nacchio, which it rested Wednesday, was testimony from high-ranking former Qwest executives who said they warned Nacchio about the company's looming financial problems, and from industry analysts who said they were unaware of the issues.
Witnesses testified that Qwest increasingly relied on one-time sales of its fiber-optic network in early 2001, a fact it did not disclose to investors until August of that year. Meanwhile, recurring revenues from reliable sources such as phone services were not growing as anticipated, making it more difficult for Qwest to achieve its publicly stated revenue targets.
"The government's case finished on a strong note," said University of Denver law professor Jay Brown, who is sitting through parts of the trial as a legal analyst for The Denver Post. "The jury is now aware of how important the (one-time sales) were to the market and that they were not being disclosed while Nacchio was trading."
But the case has weaknesses that Nacchio's attorneys will begin to exploit today as they launch the former Qwest chief executive's defense. Perhaps biggest among these is that none of the government's witnesses gave firsthand accounts of conversations with Nacchio that shed light on what motivated him to trade.
That's not a killer for the government, experts said, but it gives the defense an opening to plant seeds of doubt among jurors.
"It's disappointing the government couldn't produce some evidence about Joe Nacchio's state of mind," Brown said. "They would have benefited from specific conversations between Joe and other executives related to the trades, but they didn't get that."
The government must prove that Nacchio not only knew of Qwest's troubles, but that he traded on the basis of that knowledge. It also must demonstrate that he knew he was breaking the law and that he did so willingly.
The government's strongest evidence linking Nacchio's knowledge of Qwest's problems to the trades is that he significantly accelerated his sales during the five-month period in question.
Prosecutors hammered that point home through their final witness, a fraud examiner with the Department of Justice. Dana Chamberlain testified Wednesday that Nacchio's monthly trading volume more than quadrupled during the first five months of 2001, compared with his average trading volume over the previous three years.
Denver lawyer Tony Leffert, a former federal prosecutor, said the government appears to have provided enough circumstantial evidence of Nacchio's criminal intent.
"They've established a good foundation that he artificially kept the stock prices inflated at a time he kept on trading," he said.
Another problem for the government is that it was unable to introduce a key fact: that Qwest later restated its 2000-through-2002 financials, erasing $2.5 billion in questionable revenue.
Prosecutors did not rely on that fact as a basis for their 42 charges of criminal insider trading against Nacchio. But they tried to introduce it last week after Nacchio attorney Herbert Stern said that Qwest had made its earnings numbers for 16 straight quarters, including the first two of 2001 when he sold the shares. Judge Edward Nottingham ruled that the restatement was outside the time frame of the indictment and that it occurred after Nacchio left in mid-2002.
Prosecutors were able to present to the jury the fact that Qwest lowered its 2001 earnings guidance to Wall Street in September 2001, nearly a year after Nacchio began receiving warnings about Qwest's revenue weakness.
And Goldman Sachs analyst Prashant Khemka testified Wednesday that some of the one-time network-capacity deals that Qwest made were actually "bogus" swaps that allowed companies to book sales to meet their quarterly numbers.
The prosecution also was able to introduce a sales execution document from late 2000 that Nacchio allegedly backdated in order to avoid blatantly violating insider-trading laws.
Nacchio was Qwest CEO from 1997 to 2002, when he was forced out as the Denver-based telecom's stock price plummetted.
Staff writer Greg Griffin can be reached at 303-954-1241 or firstname.lastname@example.org.