The Association of U S West Retirees



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 decade.

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 27.

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 of guilt."

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 medical records.

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 those targets.

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 then.

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 yelled at."

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 financial penalties.

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 manner.

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.

Write to Dionne Searcey at, Peter Lattman at, Peter Grant at and Amol Sharma at