The Association of U S West Retirees



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 appeal.

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 results."

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 Nottingham 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 defraud.

  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 Nottingham 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 testimony.

  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 Denver.

Finance Editor David Milstead can be reached at or 303-954-2648.,2777,DRMN_23910_5743988,00.html