Former Qwest chief executive Joe Nacchio was charged with 42 counts of illegal insider trading Tuesday in a federal grand jury indictment alleging that he sold $100.8 million in Qwest stock in 2001 as he hid the company’s financial troubles.
Nacchio pleaded not guilty to all charges during his arraignment in federal court, where he entered and departed through a side door wearing handcuffs and no jacket, belt or tie. A federal magistrate judge ordered Nacchio released on a $2 million unsecured personal recognizance bond.
“I’m happy that I finally know what I’m shooting at. It’s pretty tough for four years to have to sit back and let everybody take shots at you,” Nacchio told reporters as he left the courthouse, clothed again in suit and tie. “I look forward to us getting on with this and telling my side of the story.”
Nacchio attorney Herbert Stern said earlier, “He is innocent and will be exonerated at trial. He welcomes the opportunity to put this speculation and innuendo to rest.”
The grand jury signed the eight-page indictment Monday. It was released Tuesday. Nacchio arrived in Denver on Monday night and turned himself in to federal authorities first thing Tuesday morning.
“Insider trading is a crime,” U.S. Attorney Bill Leone, who headed the investigation, said during a news conference.
“It’s important for corporate executives to recognize that when they’re in a possession of information that the general public is not in possession of, they’re under a duty to abstain from selling or buying stock. Failure to honor that rule impairs confidence in our market.”
Though Qwest and its former executives have faced civil lawsuits alleging widespread accounting fraud, the criminal case against Nacchio focuses just on insider trading. It alleges he sold stock from Jan. 2 to May 29, 2001, while he knew that Qwest’s stated financial targets were “extremely aggressive” and that Qwest could not reasonably expect to meet those targets.
Legal experts said the indictment was shorter and narrower in focus than perhaps any of the other corporate-fraud cases filed in recent years. It also is among the largest, in terms of dollar value, of any insider-trading cases filed in the United States.
“This has to be one of the largest insider-trading cases ever brought,” said Peter Henning, a former Securities and Exchange Commission enforcement attorney and a law professor at Wayne State University in Detroit.
Columbia University law professor and white-collar crime specialist John Coffee called the document “as simple as an indictment can be.”
He added: “They’re going to duck trying to teach the jury enough about accounting to prove fraud. … But $100 million is a number that’s going to look very large to a Denver jury.”
“It’s narrow in its scope of criminal allegations and succinct in its factual basis. It appears to be a strong case,” said Tony Leffert, a former federal prosecutor and attorney with Robinson, Waters & O’Dorisio in Denver. “It’s clearly defined, as it needs to be for a jury to understand it.”
The indictment comes more than three years after federal authorities began a criminal probe into accounting improprieties at the Denver-based phone company. It caps a series of investigations and lawsuits that began in 2001 as Qwest’s stock began to plummet and its aggressive accounting came under scrutiny.
Thousands of employees of Colorado’s largest company lost their jobs in the aftermath as Qwest nearly went bankrupt, struggled under the weight of massive debt and was forced to restate $2.5 billion in revenue from the Nacchio days.
“I’m very happy today, because he deserves whatever he gets,” said Margaret Bell, a 29-year US West and Qwest veteran who was laid off from her manager’s job in St. Paul, Minn., in 2001. “I hope they put him away. … Like a lot of other people who got laid off from Qwest, I lost a lot of money.”
Qwest investors also are paying close attention to the case. From Qwest’s merger with US West on June 30, 2000, until August 2002, Qwest shares fell from $55 to $1.11, and the company’s market value dropped by $91 billion.
The Qwest case is the largest alleged fraud in Colorado history, and Nacchio’s indictment is the highest-profile white-collar criminal prosecution ever made here, according to legal experts.
The indictment has no direct impact on Qwest, which has settled an accounting fraud lawsuit with the SEC and shored up its finances and strategic plan under Nacchio’s replacement, CEO Richard Notebaert.
“We continue in our efforts to cooperate with the government in connection with the investigation,” said Chris Hardman, spokesman for the 14-state phone company.
The indictment seeks forfeiture of $100.8 million Nacchio made in stock sales.
The trades occurred between early January and late May 2001. Nacchio sold a total of 2.5 million shares during that time in 42 transactions ranging from $156,000 to $13.6 million. From Dec. 4, 2000, to Sept. 10, 2001, Nacchio was aware of “material non-public information about Qwest’s business” indicating the company was in a precarious financial situation, according to the indictment.
“Beginning as early as August 2000, Nacchio was specifically and repeatedly warned about the material, non-public financial risks facing Qwest and about Qwest’s ability to achieve its aggressive publicly stated financial targets,” the indictment reads.
If convicted, Nacchio, 56, who is married with two college- aged sons and who lives in suburban northern New Jersey, could face up to 10 years in prison and a $1 million fine for each count.
Prosecutors faced a five-year statute of limitations to file insider-trading charges. They focused on the first five months of 2001, when Qwest’s financial problems were mounting and Nacchio’s executive team scrambled to reassure investors and analysts that the company would continue to prosper. On April 24, 2001, Qwest officials predicted 12 percent to 13 percent revenue growth for the year even as Qwest competitors’ sales were stalling.
Nacchio and his team had rushed to book questionable one- time deals before the end of the first quarter to meet Wall Street’s earnings forecasts, according to federal regulators. Without those deals, Qwest’s revenue growth for the quarter was 8 percent – not the 12 percent Nacchio reported on April 24, they said.
In the last six days of April, after he reassured Wall Street, Nacchio sold $30 million in Qwest shares. In May, he sold another $21 million, his last sales of Qwest stock as a company officer.
Prosecutors have lined up former chief financial officer Robin Szeliga, who pleaded guilty in July to one count of insider trading. Former president Afshin Mohebbi, who did not sell Qwest shares, has agreed to testify in return for immunity from prosecution. Others may also be cooperating.
In the SEC’s complaint, regulators allege that Qwest officials fraudulently boosted revenues by $3 billion from 1999 to 2002, in large part by booking revenue from sales of capacity on Qwest’s fiber-optic network up front as recurring revenue. The proper treatment would have spread the revenue over multiple years and disclosed it to investors as nonrecurring, regulators have said.
As a result of these alleged moves, Qwest’s stock was improperly inflated as Nacchio sold shares for a profit of $176.5 million from 1999 to 2001.
Of the 12 former executives sued by the SEC, at least seven have settled. Still in litigation are Nacchio, Mohebbi, former chief financial officer Robert Woodruff and former accountants James Kozlowski and Frank Blackwell.
Nacchio remains in the sights of shareholders, who reached a $400 million settlement with Qwest and several former executives in November. Qwest also settled a separate SEC action against it for $250 million in October 2004. Most of the money was to go to shareholders.
Nacchio has denied the SEC’s and shareholders’ claims.
Trading records show that Nacchio sold about $295 million in Qwest stock while he was at Qwest. Nacchio’s attorneys have said that all his stock sales were legal and that the company’s disclosures were proper.
The U.S. Attorney’s Office worked with the FBI and U.S. Postal Inspection Service to investigate the case. Michael Koenig, a Justice Department fraud section trial attorney, and Assistant U.S. Attorney James Hearty will handle the prosecution with Leone.
Staff writers Beth Potter and Andy Vuong contributed to this report.
Staff writer Greg Griffin can be reached at 303-820-1241 or ggriffin@denverpost.com.
