Feds rebut Nacchio defense
Prosecutors stick with arguments made at trial
By David Milstead
Rocky Mountain News
Saturday, November 10, 2007
Prosecutors said in April that Joe Nacchio told investors Qwest
would hit its financial targets even though he knew the
company's revenue was weakening -- then made millions by selling
his stock on that inside information.
In replying Friday to Nacchio's appeal of his conviction, they
made the same arguments. The 83-page filing mostly avoids
the sweeping arguments made in Nacchio's October appeal, which
called the prosecution "unprecedented" and said the conviction
occurred "in an atmosphere of prejudgment and vitriol."
While the prosecution's reply said Judge Edward Nottingham
properly disallowed classified information that Nacchio wanted
for a possible "national security" defense, it made the full
argument in a separate, classified filing, just as Nacchio did.
The public document Friday instead contained the prosecution's
argument about four other elements of the Nacchio appeal
covering the materiality of the revenue warnings to Nacchio, the
jury instructions, the exclusion of an expert witness and the
way the court applied the numbers from Nacchio's gains to his
sentence and penalties.
"The evidence suffices to show that Nacchio sold Qwest stock
based on material inside information with the requisite intent
to defraud," U.S. Attorney Stephan Oestreicher Jr. wrote in the
Nacchio was convicted in April of 19 counts of insider trading.
In July, he was sentenced to six years in a federal prison and
ordered to pay a $19 million fine and forfeit the $52 million
prosecutors said he earned from the illegal sales. A
three-judge 10th Circuit panel later stayed the sentence,
pending his appeal.
In their appeal, Nacchio's attorneys said testimony showed
Nacchio believed Qwest's stock price was too low and the
information he had did not reveal with any level of certainty
that it was about to drop.
Prosecutors said the evidence shows inside information of
revenue problems in the first quarter of 2001 was a "significant
factor" in Nacchio's sales.
"These were not vague 'forecasts.' They were hard facts
about the present quality and sustainability of Qwest's revenue
-- facts that Nacchio and his executives agreed would, if
disclosed, surprise investors and cause Qwest's stock price to
plummet," prosecutors argue. "And plummet it did, as
Nacchio trickled out some (but not all) of these facts."
Nacchio knew the information about the revenue weakness was
critical, prosecutors said. "That is precisely why he
refused the calls for disclosure and lied to investors about how
'pleased' he and his executives were with the first-quarter
Nacchio's attorneys argued that the jury received the wrong
instructions because it should have been told that
forward-looking statements, or long-term financial projections,
may not be considered material.
Prosecutors countered Friday by saying, "Nacchio was charged
with trading on inside information. He was not charged
with making misstatements or failing to correct past
misstatements. Thus, the instruction would have identified
unnecessary legal tests, improperly required proof beyond what
was required, and misled the jurors."
Nacchio's defense attorneys said witness Daniel Fischel's expert
testimony was improperly excluded, but prosecutors pointed to a
series of failures by the defense to provide the "bases and
reasons" for Fischel's testimony.
Nacchio's attorneys said the gain on Nacchio's stock sales was
close to $1.8 million, rather than the $28 million used by
to calculate the sentence. Prosecutors said the sentencing
guidelines do not support Nacchio's interpretation of the rules.
The appeal will be heard Dec. 18 in the 10th U.S. Circuit Court
of Appeals in Denver.
Prosecution vs. defense
• WHAT THE DEFENSE SAID: The evidence
at trial was insufficient for a jury to conclude Joe Nacchio
possessed "material" inside information when he made his sales
and sold his stock on the basis of that information.
PROSECUTION'S RESPONSE: Nacchio had material inside
information that was a "significant factor" in his decision to
sell his Qwest stock, and Nacchio acted with the intent to
• WHAT THE DEFENSE SAID: The jury
received the wrong instructions. Nacchio had requested
that jurors be told that forward-looking statements, or
long-term financial projections, may not be considered material.
PROSECUTION'S RESPONSE: Jury instructions from
on materiality and nonpublic information were correct and
complete because Nacchio was tried for insider trading.
• WHAT THE DEFENSE SAID: The court
should have allowed Daniel Fischel, a defense expert, to testify
about the materiality of the information.
PROSECUTION'S RESPONSE: The defense repeatedly
failed to provide the "bases and reasons" for Fischel's
• WHAT THE DEFENSE SAID: Nacchio's gain on
stock sales, for purposes of sentencing and penalties, was close
to $1.8 million, not the $28 million used by the court.
PROSECUTION'S RESPONSE: The court correctly
calculated Nacchio's gain on his stock sales and the forfeiture
amount because the guidelines provide no support for Nacchio's
theory of his profit.
• WHAT'S NEXT: The appeal will be
heard Dec. 18 by the 10th U.S. Circuit Court of Appeals in
Finance Editor David Milstead can be reached at
milstead@RockyMountainNews.com or 303-954-2648.