Qwest's Nacchio Is Found Guilty In Trading Case
Ex-CEO's Conviction On 19 of 42 Counts Adds To Government's Wins
By Dionne Searcey, Peter Lattman, Peter Grant and Amol Sharma
The Wall Street Journal
Friday, April 20, 2007
DENVER -- A jury found Joseph Nacchio, the former chief
executive of Qwest Communications International Inc., guilty of
19 counts of insider trading, marking a victory for the
government in the latest of a string of high-profile
prosecutions of corporate executives that it began earlier this
The verdict, in federal court here, came after six days of
deliberations on 42 counts of insider trading. Mr. Nacchio was
acquitted on 23 counts. Each count was related to Mr. Nacchio's
sale of a total of $100.8 million worth of stock in 2001.
Mr. Nacchio, 57 years old, could face life in prison, but legal
experts said he likely will draw a far lesser sentence given how
judges interpret sentencing guidelines in such cases. Each
guilty count carries at least a $1 million fine, and he is
subject to $52 million in forfeitures, the gross proceeds of the
sales for which he was found guilty. Sentencing is set for July
The former telecom executive's family broke into sobs as the
judge read the verdict and "not guilty" was heard 23 times. But
they stopped at count 24 and fell silent as the judge said
"guilty" on the rest of the counts. Mr. Nacchio was smiling
while the not-guilty verdicts were read but turned stoic when
the guilty counts came in. His lawyer said he would appeal.
The jury initially was torn, with some members favoring
acquittal on all counts and others arguing he was guilty on all
counts. The members who favored acquittal "couldn't get past
reasonable doubt," said Doug Stoneman, a 53-year-old maintenance
supervisor with Butterball Turkey Co., who was juror No. 8.
Eventually they came around.
"Given who he is and how competent he demonstrated himself to
be," he had to know he was trading on inside information, Mr.
Stoneman said. "At that point, you can't ignore what he knows."
Prosecutors were jubilant. "For anyone who has ever made a call
in Qwest territory, the term 'convicted felon Joe Nacchio' has a
nice ring to it," said Troy Eid, U.S. Attorney for Colorado. He
said the split verdict indicated "an overwhelming determination
Mr. Nacchio now joins a list of once-highflying executives
brought low by corporate scandals dating to the 1990s boom.
Among them: former Enron Corp. executives Jeffrey Skilling and
the late Kenneth Lay; Adelphia Communications Corp. founder
John Rigas; former Tyco International Ltd. CEO L. Dennis
Kozlowski; and former WorldCom Inc. CEO Bernard Ebbers.
Mr. Nacchio's conviction shows that the government, several
years after it embarked on the aggressive prosecution of
executive wrongdoing, has improved its approach to going after
corporate criminals. The formula: Keep it simple, accumulate
witnesses from lower down the corporate ladder with plea deals
and pin blame on the chief executive.
In July 2002, amid the Enron and WorldCom scandals, Congress
passed the Sarbanes-Oxley Act, which stiffened
corporate-governance and accounting rules, and President Bush
created the Corporate Fraud Task Force in the Justice
Department. Since then, the Department says, it has secured
more than 1,000 convictions or guilty pleas of corporate fraud,
including cases against more than 200 CEOs, company presidents
and chief financial officers.
The Nacchio case hinged on a simple notion: whether the
defendant "knowingly and willfully" sold stock in Qwest while he
"was aware of and on the basis of" inside information. Because
his state of mind was an issue, he revealed a family secret
about his son's suicide attempt and even offered his son's
Mr. Stoneman says that he and others didn't believe Mr.
Nacchio's claim that he was distracted by the attempted suicide
of his son. "Sympathy and compassion aren't supposed to be part
of the decision," he said.
Juror No. 2, Terrell Dye, a radiographer from Littleton, Colo.,
said in a phone interview that the suicide attempt had little
bearing on the case. Instead, he said a crucial event was an
April 2001 investor call in which Mr. Nacchio withheld
information that would have demonstrated risk to Qwest's revenue
targets. A few days later, Mr. Nacchio started selling again.
"It came to a point where we couldn't ignore the facts or common
sense any longer," Mr. Dye said.
The government had worked to show jurors that Mr. Nacchio was
trying to pump up Qwest's stock with questionable accounting
practices that counted one-time revenue swaps of fiber-optic
capacity with other companies as long-term revenue. Their
witnesses testified that Mr. Nacchio set unreasonable targets
for internal budget goals and demanded that his employees meet
Prosecutors were banned from telling jurors that Qwest restated
$2.48 billion in revenue in 2000 and 2001. And jurors never
learned that Mr. Nacchio was forced out of Qwest in June 2002 as
the company's stock nose-dived and questions from federal
authorities about the company's accounting piled up.
In an extremely brief defense case, Mr. Nacchio's lawyers called
a witness who aimed to show that Mr. Nacchio's stock sales in
question were nothing out of the ordinary compared with his past
sales. The only other two defense witnesses, Qwest founder and
railroad magnate Phil Anschutz and a Catholic abbot, testified
about learning of Mr. Nacchio's son's suicide attempt in January
2001. Both said Mr. Nacchio had wanted to resign from Qwest
The Catholic abbot also testified about Mr. Nacchio's trip to
help the poor in Kentucky. Mr. Stoneman, the juror, said he
wasn't impressed. "It might have carried more weight if he
hadn't brought a photographer with him," he said referring to a
point made by prosecutors.
Defense attorneys tried to use their testimony to show that Mr.
Nacchio wanted to leave the company and was consumed with
thoughts of his son rather than focusing on illegally pumping up
Qwest's stock for his financial benefit. But prosecutors
pointed out during closing arguments that Mr. Nacchio didn't
quit his job but was flying in his corporate jet on several
dates throughout his son's hospitalization and was persuaded to
stay by a large raise from Qwest's board.
The jury took its first vote several days into the
deliberations. The outcome: 10 members favoring conviction on
numerous counts, with two holdouts, Mr. Stoneman said. "There
was a great deal of emotion" in the jury room but members acted
cordially, he said. "No one was put on the spot. No one was
Largely absent from the trial was any evidence to support Mr.
Nacchio's theory that he believed Qwest could weather mounting
financial problems because lucrative secret government contracts
were headed Qwest's way. Lawyers for both sides and for
clandestine government agencies had spent numerous hours in
closed hearings arguing over classified evidence that Mr.
Nacchio wanted to use. Mr. Nacchio's lawyers filed redacted
briefs objecting to the court's exclusion of at least some of
the classified evidence. The matter is expected to be a major
point in Mr. Nacchio's appeal.
Qwest was founded in the mid-1990s by Mr. Anschutz, who in 1997
tapped Mr. Nacchio, who had worked his way up the ranks of the
old AT&T Corp., as CEO to take the business public. Qwest soon
took over a Baby Bell, U S West, and set out to build an
expensive fiber-optic network to carry Internet traffic
world-wide. But other telecoms did the same, and when demand
didn't match their dreams, the telecom bubble burst.
Mr. Nacchio's wife and son Michael, a law student, attended the
trial every day sitting attentively in the front row and both
breaking into sobs -- along with the defendant -- during
testimony about Mr. Nacchio's other son's emotional problems in
2001. Jurors listened carefully as both the prosecution and
defense broke down the types of shares Mr. Nacchio held and the
millions of dollars they were worth. They saw internal memos
from Mr. Nacchio's team complaining about revenue projections
that were too high.
One was an email to Mr. Nacchio and others containing only the
word "bulls-," a response from a former Qwest vice president to
being told he had to boost 2001 revenue from his unit by
millions of dollars.
The government began looking into improprieties at Qwest in 2002
as questions mounted about telecoms that sometimes pumped
revenue by swapping fiber capacity and interpreting accounting
rules so they could recognize revenue for the capacity they
swapped. When this practice was exposed at Qwest, the company
nearly went bankrupt.
But not one of the six former Qwest executives charged with
crimes related to alleged accounting fraud at the company has
served prison time, a past point of contention between the
Department of Justice and the Denver U.S. Attorney's office.
In 2004, the Justice Department tried four former Qwest
executives on conspiracy and securities-fraud charges. Two of
the four were acquitted on all charges. Two later pleaded
guilty to some charges and received probation sentences and
Mr. Nacchio was indicted in 2005, but he fought back by raising
the specter of pursuing a national security defense. Mr.
Nacchio hired as his attorney Herbert Stern, who had handled
classified evidence as special counsel for the Iran-Contra
indictments against former Lt. Col. Oliver North.
Appointed U.S. Attorney last fall, Mr. Eid culled a new team of
deputies from the Enron and HealthSouth Corp. prosecutions to
work on the Nacchio case. The team used key phrases from former
high-profile prosecutions and even asked witnesses similar
questions. Lead prosecutor Cliff Stricklin asked the abbot
testifying for Mr. Nacchio whether "good people can do bad
things," the same question he asked defense character witnesses
in the Enron trial.
Mr. Stricklin also put witnesses on the stand such as a former
vice president who testified about a "signed in blood" meeting
where Mr. Nacchio made business heads sign their names beside
revenue targets they thought were far too high. His team showed
jurors a memo from one analyst angered by revelations of
questionable accounting at the company, who wrote Qwest that
"investors don't know how many cockroaches you still have in
your bag." They said Mr. Nacchio forged the date on a document
certifying he didn't have inside information at the time he
ordered the sale of $14 million of stock.
The government had worked to show jurors that Mr. Nacchio was
repeatedly warned the market for fiber swaps was drying up and
that it could be a serious blow to Qwest's budget. Their
witnesses testified that Mr. Nacchio set unreasonable revenue
targets and demanded that his team somehow meet them, all the
while presenting a sunny outlook to investors as he cashed out
in stock sales.
Many of the trades for which Mr. Nacchio was acquitted were
linked to a predetermined stock selling plan. The trades for
which he was found guilty came after a series of meetings with
subordinates who warned him that Qwest was in trouble.
The defense elicited testimony that the revenue-pumping
concerned internal Qwest budgets, upon which managers' bonuses
depended. Mr. Stern showed video clips of Mr. Nacchio
announcing details of his 2001 stock sales months in advance and
emphasized that he had sold stock in the past in a similar
The Enron trial may have provided a general template for Mr.
Stricklin and his team. In some earlier prosecutions involving
complicated financial matters, prosecutors were criticized for
confusing the jury with arcane accounting evidence. But the
Enron prosecutors took a simpler approach, reducing the risk
that jurors would feel overwhelmed.
Dionne Searcey at
firstname.lastname@example.org, Peter Lattman at
email@example.com, Peter Grant at
firstname.lastname@example.org and Amol Sharma at