Image: Joe Nacchio, Anne Esker
David Zalubowski  /  AP file
Joe Nacchio, former chief executive officer of Qwest Communications, walks with his wife, Anne Esker, as they enter the federal courthouse in downtown Denver last week.
updated 4/20/2007 2:10:05 PM ET 2007-04-20T18:10:05

He was a symbol of the go-go 1990s, a brash, tough-talking executive who appeared on magazine covers and pulled off one of the largest deals in the telecom industry, merging upstart Qwest Communications International with the lumbering local phone giant, U.S. West Communications, for $48 billion in 2000. But on Apr. 19, Joseph Nacchio was convicted on 19 of the 42 counts of insider trading brought against him, ending the era of high-profile white collar trials against American executives triggered by the 2000–02 stock market meltdown. The 57-year-old New Jersey resident — who will appeal the verdict — faces a maximum of 10 years in prison and $1 million on each of the counts, although the judge is likely to deliver a less harsh prison term. Sentencing in U.S. District Court in Denver has been set for July 27, and Nacchio was released on bond.

Nacchio was accused of selling more than $100 million worth of Qwest stock in the first few months of 2001, while knowing that the company could not meet the ambitious sales and earnings targets he had set. His attorney, Herbert Stern, had argued that while some Qwest executives may have voiced concerns about the targets, Nacchio himself believed the company could make the numbers. Further, Stern said the stock sales had not been out of line with historical patterns and advice Nacchio had received from the board and financial consultants.

It was an emotional moment in the courtroom as the verdict was read. The eight-man, four-woman jury found Nacchio not guilty of the early counts, news that prompted Nacchio to smile and look back at his family before the guilty verdicts started rolling in. Nacchio had attended each day of the trial, arriving at Denver's federal courthouse arm-in-arm with his wife and one of his sons. "It's a big victory for the government," says Thomas Ajamie, a Houston-based securities lawyer who had been following the case. "It's sending a loud message to Corporate America."

Pinning down 'material information'
One key to the prosecution's success may be that the government chose to accuse Nacchio only of insider trading, rather than more complicated issues surrounding the company's accounting. Qwest's business had started to slide in 2001 as demand for high-speed data services dried up. The company had come to symbolize the aggressive accounting prevalent in the industry, particularly the ability of carriers to swap network capacity with each other in a manner that produced reported sales and earnings but little in the way of real cash. Carriers such as Global Crossing and WorldCom Communications went bankrupt in the resulting industry slump. Qwest narrowly avoided bankruptcy but did restate more than $2 billion of its revenue and pay hundreds of millions of dollars to settle regulatory and shareholder accusations of sketchy accounting.

Jay Brown, a professor at the University of Denver who has been following the case on his securities law blog,, says the fact that the jurors found Nacchio innocent on the earlier charges suggests they believe he may not have known the earnings targets were too ambitious in the early months of the year, but that after the March close of the first quarter, business conditions were probably more clear.

Prosecutors brought in two securities analysts who had voiced concerns at the time about Qwest's continuing ability to engage in network swaps with other carriers. They testified that the deterioration of that part of Qwest's business was relevant to investors. "I found it odd that the defense never addressed that," Brown says.

With a line reminiscent of attorney Johnnie Cochran's famous, "If it doesn't fit, you must acquit," in the O.J. Simpson trial, federal prosecutor Colleen Conry summed up the case as: "If you don't tell, you can't sell." That appears to have resonated with the jurors. On the fourth day of their deliberations, they asked U.S. District Judge Edward Nottingham to reread for them the definition of "material information." Nottingham read from jury instructions that include a definition as any information "a reasonable investor would consider important in deciding to act."

A costly gamble
The defense, meanwhile, may have taken a risk by not allowing Nacchio on the stand to defend himself. The relatively short, two-day defense included an appearance by Qwest founder and former co-chairman Philip Anschutz, who testified that he had tried to keep Nacchio at the company after the executive expressed a desire to leave to care for his suicidal son. A Nacchio appearance, on the other hand, might have included testimony that he believed a large and secret government contract was coming that would have helped the company meet its earnings targets. Speculation about such a defense began circulating before the trial, but never came up in testimony.

"They went with defense-lite," says Peter Henning, a professor of law at Wayne State University who also maintains a white-collar crime blog. "They didn't want to put him on the stand and deal with cross-examination. It's a calculated risk in any prosecution." In this case, it's a bet that may have cost Nacchio his freedom.

Copyright © 2012 Bloomberg L.P.All rights reserved.


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