His team rejoices, but he should consider a plea deal
By David Milstead
Rocky Mountain News
Tuesday, March 18, 2008
Those who wish to see Joe Nacchio whisked off to prison ASAP
must be maddened, infuriated, perhaps shocked and surprised that
his conviction got tossed.
Overcome all those emotions and take solace in Monday's
decision. The only good news for Nacchio is that he's getting a
new trial. The bad news is that while the 10th Circuit Court of
Appeals cut down the conviction, the judges also took an ax to
much of Nacchio's defense, saying a jury could have found him
* The judges took Nacchio's classified-national-security
defense, which preoccupied imaginations and took hours of legal
time, and placed it directly in the garbage can where it
Nacchio had said he knew of top-secret government contracts that
would allow Qwest to hit its earnings targets.
The judges took three paragraphs of a 60-page opinion to dismiss
the defense, noting that if an executive trades on both positive
and negative insider information, "he has violated the law in
two respects, not none."
* The jury didn't need to be told of "safe harbor" rules that
protect executives who make estimates. Nacchio was "prosecuted
for concealing true information while trading, not for making
"The insider trading duty is to disclose or abstain," they
added, a more-formal recitation of prosecutor Colleen Conry's
"if you don't tell, you can't sell."
* Also wrong: the argument that Qwest's network-capacity sales
were clearly immaterial.
This was one of the biggest lines of questioning by the judges
at December's appeal hearing. They sent signals they would buy
into the defense argument that hundreds of millions of dollars
in lost sales wouldn't matter to an investor, particularly since
it wasn't more than 5 percent of Qwest's annual revenue.
But the judges said they found no case that "adheres rigidly" to
a specific number. They instead turned to the SEC's guidelines.
The "rule of thumb" of 5 percent is the starting point for
analysis, not the end, they said.
Qwest's gap between reality and guidance of $900 million -- a
shortfall of 4.2 percent -- was "not necessarily immaterial."
* Nacchio's claims of optimism are not a defense. If he knew
that he was more optimistic than the market, and that Qwest's
stock would fall when he disclosed what he knew, "he is not
exonerated by his bullishness."
* The explanation that Nacchio had to exercise his stock options
and sell in the spring of 2001, before they expired two years
later, is also not enough.
The holder can hold the stock rather than sell, the judges
noted. Nacchio's claim he sold for tax reasons is plausible,
"but the jury did not have to believe it."
Let's be clear about this: Nacchio and his team are celebrating
the reversal, not mourning the losses on these specific points.
But instead of an outright acquittal on appeal, which was
theoretically possible, Nacchio gets to go through the wringer
All he got Monday was one expert witness who literally put
observers to sleep with his limited testimony in the first
The defense gets another shot to improve on its mistakes, but so
does the prosecution. Nacchio can roll the dice a second time,
but he ought to consider a plea bargain, rather than risk
joining other CEOs who thought a trial by jury was a path to
Testimony at issue
Law professor Daniel Fischel testified during Nacchio's trial
and was paid about $25,000 -- or $1,000 per hour -- for his
According to a document prepared by Nacchio's defense, Fischel
was prepared to testify further that Nacchio's use of options in
early 2001 was consistent with his past stock sales, contrary to
the prosecution's assertion that they "accelerated." Fischel
planned to say the sales suggested Nacchio was not trading on
inside information and that the sales were consistent with
someone trying to diversify his holdings.