Ex-Qwest CEO likely to be indicted before year's end on insider
By Jeff Smith, Rocky Mountain News
Saturday, November 5, 2005
Joe Nacchio, former Qwest chief executive officer and the focus
of a federal criminal investigation, is likely to be indicted on
insider trading charges before year's end, sources have told the
Rocky Mountain News.
Prosecutors are said to be in the final phase of completing a
three-year-old investigation of former Qwest executives.
Marcia Horowitz, Nacchio's spokeswoman, on Friday referred to a
statement this week in which Nacchio reiterated his innocence.
"Mr. Nacchio has repeatedly denied any wrongdoing and will . . .
fully assert his rights and defenses as Qwest's former CEO," his
attorney Charles Stillman said Tuesday.
It was unclear Friday whether any other former Qwest executive
besides Nacchio faces a possible indictment.
A guilty plea last summer on insider trading charges by former
Qwest Chief Financial Officer Robin Szeliga indicates federal
prosecutors are focusing in large part on April and May 2001,
when Nacchio sold about $50 million of stock during a three-week
Szeliga pleaded guilty to having insider information when she
exercised stock options for a $125,000 profit on April 30, 2001.
Nacchio already faces civil fraud charges filed this year by the
Securities and Exchange Commission. The SEC accused Nacchio of
orchestrating a massive $3 billion financial fraud at Qwest from
1999 to 2002. He was accused of misleading investors about the
company's true financial condition and of personally profiting
from a revenue-inflation scheme that kept the company's stock
price propped up. The stock eventually collapsed, and investors
lost billions of dollars.
This week, class-action shareholders settled with Qwest
Communications for $400 million, but they carved out Nacchio
from the settlement, so they could pursue him and his money
Possible deadline looms
Attorneys close to the case say they believe a decision of
whether to charge Nacchio criminally almost has to come before
year-end. The timing is drawn from the federal prosecutors'
request last July to freeze the civil cases for 150 days so they
wouldn't interfere with the criminal investigation.
That freeze, or stay, was granted by a federal judge through
Dec. 31. While it's possible it could be extended, some believe
it would be risky and perhaps embarrassing for the government to
ask for another extension. A judge also may be likely to reject
an additional extension, especially if it's vigorously opposed.
Another date that intrigues attorneys relates to lead prosecutor
William Leone. Leone was sworn in as U.S. attorney in Colorado
in late July after President Bush failed to nominate a
replacement for predecessor John Suthers within the legal
deadline. But Leone's appointment is supposed to last only 120
days or until Bush nominates and the Senate confirms a new U.S.
attorney. That could be putting pressure on Leone to wrap up
Szeliga is seen as a key witness, since her ability to avoid
prison possibly depends on the level of cooperation she gives to
federal prosecutors. The U.S. attorney's office said in a court
filing in late September that Szeliga "has provided significant
In her 16-page plea agreement in July, Szeliga said she and
other unnamed "senior Qwest executives" knew by at least April
24, 2001, that Qwest was meeting its revenue targets only
through "gap fillers" such as questionable one-time sales of
But she said Qwest management decided against disclosing that
information to investors during its first-quarter earnings call
on April 24, 2001.
On that day, Szeliga and Nacchio highlighted Qwest's
double-digit revenue growth amid a weakening industry and
reaffirmed double-digit growth projections. No detail was
provided on the capacity sales, which accounted for more than
$400 million of Qwest's first-quarter revenue of $5 billion.
Two days later, Nacchio started a three-week flurry of
exercising stock options that would net him about $42 million in
profits that spring. Those stock sales accounted for more than
20 percent of his total sales during his five years at Qwest.
On April 29, 2001, Nacchio appeared on
Fox News and stated
that most of Qwest's growth came from new products "and, quite
frankly, the taking of market share" from larger long-distance
The SEC, in its civil case against Nacchio, has alleged that
such a statement was fraudulent.
On April 30, 2001, Szeliga exercised her stock options.
Auditor leery of sales
Prosecutors have been investigating other key events that
spring. Documents made public from that period show Arthur
Andersen, the company's outside auditor, told Qwest to disclose
to investors the telco's dependence on network capacity sales.
Qwest at the time was among the most aggressive in the industry
in booking revenue upfront from trades or exchanges of network
capacity. Arthur Andersen already had characterized the
accounting of those swaps as "maximum risk," bordering on
On April 18, 2001, Arthur Andersen's Mark Iwan, who had recently
been re-engaged as Qwest's audit partner, raised concerns to Tom
Stephens, then Qwest's audit committee chairman, about a number
of deals, including a $109 million swap with Global Crossing.
Stephens' notes from the conversation indicate that Iwan said
that particular swap "stinks."
Stephens scribbled: "The sky is falling."
The audit committee was scheduled to discuss those issues with
Qwest's financial management, including Szeliga, on April 20,
but the minutes of that discussion haven't been publicly
While it's unclear what Szeliga may have shared with Nacchio at
the time, Nacchio himself told federal lawmakers in fall 2002
that Szeliga's office was next to his and "we met daily . . .
she had open access."
But Nacchio also defended the capacity sales and swaps as having
legitimate business purposes, such as to fill geographic holes
in Qwest's nationwide fiber-optic network.
And after the SEC civil charges were filed this year, Nacchio's
attorney Stillman stated: "The case against Joe Nacchio comes
down to the simple proposition: Should he have known that a
particular kind of revenue needed to be disclosed in Qwest's
public statements? The answer is no. Qwest made its
disclosures only after experienced, expert employees, auditors
and lawyers determined what was appropriate."
Szeliga implicated in sales
By May 10, 2001, an e-mail circulating through Qwest finance,
sales and operating ranks indicated Szeliga herself had ordered
a stop to large capacity swaps.
According to the e-mail by then Qwest finance director Matthew
Scott, Arthur Andersen had told Qwest it needed to disclose the
total scope and volume of its network capacity sales and swaps.
Gregory Casey, Qwest's top sales executive, got a copy of the
e-mail and sent it to Afshin Mohebbi, Qwest's chief operating
officer. Mohebbi immediately realized the importance of the
e-mail and wrote back to Casey: "We've got to get to the bottom
of this thing fast."
Casey advised by e-mail that Qwest lower its financial
projections and "put the best face on to Wall Street that we
Mohebbi responded: "Don't count on a reset right now. I will
talk to Robin (Szeliga) on the accounting rules."
On May 15, 2001, Nacchio stopped selling Qwest stock. He said
he had exercised his stock options over the years based on the
recommendation of his advisers to diversify his holdings. In
testimony before a congressional panel in October 2002, Nacchio
said he had placed a stop order once Qwest shares dropped below
$38 a share.
"Anytime I sold Qwest stock, I believed the company's financial
statements represented a full and accurate picture of its
financial condition," he told Congress.
It wasn't until August 2001 that Nacchio disclosed the scope and
volume of the company's fiber-optic capacity sales. He did so
during a road trip to talk to Wall Street analysts who had
become increasingly skeptical of Qwest's underlying financial
Mohebbi and Qwest's former chief counsel, Drake Tempest, who
sold stock during spring 2001, also have been people of interest
to criminal investigators. One or both of them may be
cooperating with investigators, according to sources familiar
with the case.
There are conflicting accounts of whether former Qwest Chief
Financial Officer Robert Woodruff is under criminal
investigation. Woodruff faces a civil fraud suit by the SEC but
had left Qwest by spring 2001.
Other possible key witnesses for the prosecution include Casey,
the former top sales executive, who agreed to pay $2.1 million
to settle civil fraud charges with the SEC. Casey settled
allegations that he backdated contracts and caused the company
to buy capacity it didn't need.
Anschutz also sold shares
The period in spring 2001 also could be troublesome for Qwest
founder Phil Anschutz and associate Craig Slater, who both sold
large amounts of Qwest stock in late April and early May 2001.
Anschutz entered into private deals in early May 2001 to sell
about 2 percent of his Qwest stock, receiving $179.4 million in
cash. Slater made about $8 million in pretax profits by
exercising options in late April 2001.
But it doesn't appear that either are under active investigation
by federal prosecutors. Prosecutors likely would have to prove
that Anschutz and Slater, who were directors on the board at the
time, were aware of the alleged accounting fraud at the company.
According to a federal court filing last month, Anschutz
testified in front of the SEC last January, while Slater
testified for two days in October 2004. Criminal investigators
presumably would have examined the transcripts of that
Anschutz spokesman Jim Monaghan has long said that neither
Anschutz nor Slater had any insider information. The House and
Energy Commerce Committee came to a similar conclusion after
interviewing Anschutz twice in 2002, despite Nacchio saying that
Anschutz was actively involved in Qwest's business.
The SEC also decided not to press a case against Anschutz or
Slater, and the lawyers for the class-action shareholders didn't
see Anschutz as being involved in Qwest's day-to-day operations.
"We looked at Anschutz," Patrick Coughlin, a partner in the
stockholders' lead law firm, Lerach Coughlin Stoia Geller Rudman
& Robbins, said this week. "And frankly we just didn't think we
had anything. In this case, you have to prove actual
What's in store
What Joe Nacchio, former
Qwest CEO faces:
probe: Focus of a criminal investigation centered on spring
2001. Nacchio sold $49 million of Qwest stock in a three-week
period between April 26 and May 15, 2001, for a pretax profit of
about $42 million.
• Civil charges:
Faces civil fraud charges filed by the Securities and Exchange
Commission. The SEC is seeking $216 million that Nacchio made
from stock profits, salary, bonuses and perks.
• This week:
Qwest class-action investors said they will proceed to trial
with their civil claims against Nacchio.