The Association of U S West Retirees



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 guilty.


* 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 belonged.

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 misleading statements."

"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 again.

All he got Monday was one expert witness who literally put observers to sleep with his limited testimony in the first trial.

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 acquittal.

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 work.

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.