Nacchio Convicted of 19 of 42 Charges

By SANDY SHORE

DENVER – Joe Nacchio, a former AT&T executive tapped to transform Qwest Communications into a major telecommunications competitor, was convicted Thursday of 19 of 42 insider trading charges after one-time top executives described his relentless drive to meet revenue projections without revealing financial risks.

A federal jury deliberated six days before concluding on 19 counts that the former Qwest chief executive illegally sold $52 million worth of stock in April and May of 2001, when he knew the company faced financial challenges and relied heavily on one-time sales to meet revenue targets. The jury acquitted him on the other 23 counts stemming from sales in January and February.

U.S. District Judge Edward Nottingham set a July 27 sentencing date for Nacchio, who is free on $2 million bail. Each count carries a potential penalty of 10 years in prison and a $1 million fine. Nacchio also could be required to forfeit the $52 million, although the exact amount will be determined by the judge at sentencing.

"’Convicted felon Joe Nacchio’ has a very nice ring to it," boasted Troy Eid, the U.S. attorney for Colorado. Prosecutor Cliff Stricklin, who headed the government’s team, said he planned to seek prison time for Nacchio.

"We certainly will appeal," defense attorney Herbert Stern said.

Nacchio, who still faces a civil fraud lawsuit, declined to comment. A smile sometimes crossed his face as he left the courthouse arm-in-arm with his wife. They walked away together on a busy downtown street.

The 12 jurors left the courthouse without commenting.

Nacchio, 57, was accused of selling $101 million worth of stock in the first five months of 2001 based on inside information that Qwest faced financial risks. With the decision, the eight men and four women on the jury turned away Nacchio’s claim that he believed in the company’s future despite concerns voiced by business managers.

The criminal case stemmed from a years-long government investigation into an accounting scandal at Qwest Communications International Inc., a Denver-based primary telephone service provider in 14 mostly Western states.

Federal regulators have said Qwest falsely reported fiber-optic capacity sales as recurring instead of one-time revenue between April 1999 and March 2002. The practice allowed Qwest to improperly report about $3 billion in revenue, which helped pave the way for its acquisition of former Baby Bell U S West Inc., regulators have alleged. Qwest later restated about $2.2 billion in revenue.

Jurors convicted Nacchio on counts involving trades he made after April 24, 2001. Those were the first trades that occurred after Qwest released its financial results for the first quarter but didn’t reveal how much of the revenue came from one-time sales.

Nottingham read the verdicts from Count 1, which involved a Jan. 2, 2001, sale, to Count 42, which involved a May 29, 2001, sale.

As he began repeating "not guilty," Nacchio’s wife and son broke down into sobs, but they grew quiet as the judge began reciting guilty verdicts for the trades in April and May.

Stricklin said the jury "saw at some point that Joe Nacchio knew what investors didn’t and chose to profit from it."

"Insider trading is not a victimless crime. It’s a crime about fairness," Stricklin said. "Many lost their hopes and dreams while others at Qwest took the easy way out."

Many former U S West and Qwest employees and retirees lost savings as Qwest’s share price fell precipitously starting in 2001. Some of them applauded the verdict.

"This was our one shot at getting some sort of justice, and the retirees I know are all very gratified that this verdict has come through," said Mimi Hull, president of the Association of U S West Retirees.

A civil fraud lawsuit is still pending against Nacchio, former President Afshin Mohbebbi and other one-time executives, alleging they orchestrated a financial fraud that led to the scandal. The Securities and Exchange Commission is seeking repayment and civil penalties, with the amounts to be determined at trial.

Prosecutors wove a circumstantial case against Nacchio based on the testimony of those who worked closely with him – a former company president, a one-time chief financial officer, an investor relations executive and business unit managers.

Most testified either under grants of immunity in exchange for cooperation or after pleading guilty to a crime, saying they repeatedly warned Nacchio that Qwest would not meet aggressive financial targets for 2001 without relying heavily on revenue from one-time sales that came from a waning market.

Despite their warnings, Nacchio refused to lower forecasts and did not tell the public how much one-time revenue was included in earnings, the witnesses said.

Nacchio’s attorneys narrowly tailored their defense, arguing the ambitious entrepreneur believed Qwest would succeed despite the warnings. They said Nacchio had to sell the shares under terms of his employment contract, particularly 350,000 growth shares sold in early January 2001 for a little more than $14 million, because the company chose to give him shares instead of cash he was owed.

Before trial, defense attorneys argued Nacchio, through his membership on two government panels, was alone among Qwest executives who knew the company could receive lucrative contracts from clandestine government agencies. At trial, attorneys didn’t present any direct evidence about classified information.

Nacchio’s defense presented just three witnesses. Qwest founder Phil Anschutz and a Roman Catholic abbot testified that Nacchio wanted to resign in January 2001 to remain in New Jersey with his family after a son attempted suicide.

Daniel Fischel, an author and Northwestern University professor, testified about Nacchio’s pattern of stock sales to counter prosecutors’ argument that Nacchio accelerated his trades ahead of the worsening financial picture at Qwest. His calculations excluded Nacchio’s so-called growth shares.

A key point in the prosecution’s case was Nacchio’s decision to sign an irrevocable commitment in late 2000 to sell the growth shares.

Prosecutors said he decided to sell after hearing worsening news from business managers in early December 2000 but backdated the sales document to Nov. 3, 2000. Defense attorneys insisted that Nacchio gave oral instructions committing to sell the shares in November and that the document was drafted at a later time.