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Nacchio team ponders 'unusual defense'
Secret deals misled Qwest's former CEO, attorneys may argue
By Jeff Smith, Rocky Mountain News
Tuesday, November 22, 2005

A possible defense floated by former Qwest Chief Executive Joe Nacchio - who could be indicted on insider-trading charges before year-end - raised some eyebrows Monday. The Wall Street Journal reported that Nacchio's attorneys have been "mounting an unusual defense," arguing their client believed the Denver telco was in good shape in the spring of 2001 because it was getting "lucrative secret" national security-related contracts and was in position to get more.

Former federal prosecutor Tony Leffert of Denver said it struck him as unusual that the specifics of a defense would be circulated, presumably by the defense team, before a possible indictment is returned.  And Leffert noted the defense at least on the surface isn't logically consistent with Nacchio selling about $50 million of Qwest stock in April and May of 2001.

"In most insider-trading cases where executives are selling stock, it's an unusual circumstance where they thought the company was doing well," said Leffert, a partner at Robinson Waters & O'Dorisio.

The Journal, which cited anonymous sources, reported that Herbert Stern, a former federal judge and federal prosecutor, has become Nacchio's lead defense attorney. Neither Stern nor Nacchio's former lead attorney, Charles Stillman, returned phone calls Monday.

Jeff Dorschner, a spokesman for the U.S. attorney's office in Colorado, declined to comment on the Journal article.  Dorschner also declined to comment on whether federal prosecutors had issued Nacchio a "target letter," which sometimes precedes an indictment and could spark a last-ditch effort by the defense to thwart criminal charges.

Stillman, in disputing civil fraud charges against Nacchio, has argued in court filings that Nacchio at most was guilty of "puffery" and "corporate optimism" - but didn't mislead investors.  Analysts started to question Qwest's finances in June 2001, and the company's stock and performance unraveled soon after.

Nacchio's stock sales in early 2001 were previously defended as an effort to diversify his investment portfolio.  His proceeds came from exercising stock options.

The Journal reported that Nacchio's defense team is arguing he was in a "unique position" to believe his company was still performing well because he was serving on two federal advisory panels dealing with national security issues - the Network Reliability and Interoperability Council and the National Security Telecommunications Advisory Committee.  But Nacchio reportedly wasn't nominated by President Bush to serve on the second panel until July 2001.

Former Qwest Chief Financial Officer Robin Szeliga already has pleaded guilty to insider trading concerning a transaction in the spring of 2001, and federal prosecutors are thought to be focusing on that period of time.  In her plea agreement, Szeliga said Qwest senior executives knew by at least April 24, 2001, that Qwest was meeting its bullish revenue targets only through questionable and undisclosed one-time capacity sales.

On April 24, 2001, Nacchio reported double-digit revenue growth for Qwest's first quarter at a time other telcos were weakening.  Qwest's news release highlighted numerous reasons for the company's growth but didn't mention federal government contracts.

In the conference call that day, Nacchio poked fun at AT&T's weaker performance, saying, "To quote a famous English group (Monty Python), 'And now for something completely different.' ",2777,DRMN_23916_4257534,00.html