Ex-CEO To Base DefenseOn Federal Pacts
By Shawn Young, Staff
THE WALL STREET JOURNAL
Monday, November 21, 2005
Joseph Nacchio, the former
Qwest Communications International Inc. chief executive
under scrutiny in an insider-trading probe for selling
shares of the company as it was allegedly fudging its books
to boost revenue, is mounting an unusual defense: He
believed Qwest was doing well because it was getting
lucrative secret national-security-related work from the
federal government, people familiar with the matter say.
Mr. Nacchio, 56 years old, has been a focus of a three-year
federal investigation into the scandal that forced Qwest, a
Wall Street stock darling during the late 1990s, to restate
$2.5 billion in revenue and $2.2 billion in earnings for
2000 and for 2001, the year the accounting problems began
coming to light.
A decision on whether to indict Mr. Nacchio, who left Qwest
in 2002, is expected by the end of the year, people familiar
with the matter say. Any charges against him likely would
be narrower than the sweeping fraud indictments against
other high-profile former CEOs, including Bernard Ebbers of
WorldCom Inc. (now MCI Inc.) and John Rigas of Adelphia
Prosecutors aren't likely to accuse Mr. Nacchio of
Denver phone company's books, these people say. Instead,
Colorado's acting U.S. attorney, William Leone, is focusing
on whether Mr. Nacchio sold Qwest stock in 2001 based on
insider knowledge that the company wasn't doing as well as
he and other executives claimed publicly, these people say.
People familiar with the matter say Mr. Nacchio's defense
team is trying to head off any indictment by arguing that he
was in a unique position to believe the company was
performing as claimed because he knew that Qwest had landed
some federal national-security contracts and was poised to
get more. At the time, Mr. Nacchio was serving on two
federal advisory panels that dealt with such issues -- the
Network Reliability and Interoperability Council and the
National Security Telecommunications Advisory Committee --
so he would know generally about the government's needs.
If charged, Mr. Nacchio would counter any assertion that he
knew the company was faltering in part by arguing that other
executives who had expressed worries about revenue
shortfalls internally didn't know about those projects, the
people say. Mr. Nacchio long has insisted through
representatives that he did nothing wrong and that he made
every effort to be forthcoming.
Mr. Nacchio recently retained Herbert Stern, a former
federal judge, as his lead defense lawyer. Mr. Stern, also
a former prosecutor, played prominent roles in the
investigations of the Iran Contra affair and the murder of
Malcolm X. He couldn't be reached for comment yesterday.
Qwest last year agreed to pay $250 million to settle civil
accounting-fraud charges by the Securities and Exchange
Commission without admitting or denying wrongdoing.
Prosecutors haven't charged any top executives with
doctoring financial statements. Former Chief Financial
Officer Robin Szeliga agreed earlier this year to plead
guilty to one insider-trading charge and to cooperate with
the government's investigation.
At a jury trial in 2004, prosecutors failed to convict on
any of 44 charges brought against four former midlevel Qwest
executives charged with scheming to improperly book sales.
Two executives were acquitted, and the other two later
pleaded guilty to reduced charges and agreed to cooperate
The continuing investigation is unlikely to result in
criminal charges against other former Qwest executives,
people familiar with the situation say.
In a civil lawsuit accusing Mr. Nacchio and other former
Qwest executives of financial fraud, the SEC said Mr.
Nacchio made $176 million in profit selling Qwest stock from
1999 through 2001. The U.S. District Court in Denver has
delayed action on that suit until the end of the year so it
wouldn't interfere with the criminal investigation. That
delay possibly could be extended.
Questions about Mr. Nacchio's motivation to sell stock would
be important to any insider-trading case. At the time, he
openly defended selling Qwest stock after critics said such
sales by a chief executive were unseemly. He said the
sales, which occurred at regular intervals, were part of a
prearranged trading schedule aimed at keeping his overall
portfolio diversified and at raising funds to pay taxes on
the exercise of stock options that were about to expire.
All that could make it harder for prosecutors to argue that
Mr. Nacchio traded opportunistically or secretively.
Investigators have been looking to see whether any of the
trades didn't conform to Mr. Nacchio's prearranged trading
program, people familiar with the situation say.
The statute of limitations on insider trading is five years,
which means deadlines are nearing for trades in early 2001.
Ms. Szeliga's illegal trade occurred in the spring of 2001,
and people familiar with the matter say that period remains
a focus of the Nacchio inquiry. During that time, Mr.
Nacchio exercised options on millions of dollars of stock
and sold shares with a market value of roughly $50 million,
according to SEC data compiled by Thomson Financial. Such
sales are legal as long as they conform to certain
restrictions and don't violate insider-trading laws.