Joe Nacchio knew Qwest was heading for the falls in early 2001, so the chief executive sold 2.5 million shares for $100.8 million before the word got out.
That, in a nutshell, is what the government alleges in its case against Nacchio, which goes to trial Monday in federal court in Denver.
Prosecutors will rely on the testimony of former Qwest executives – most prominently former chief financial officer Robin Szeliga and former president Afshin Mohebbi – and other evidence to prove that Nacchio knew Qwest was in trouble when he sold his shares.
Szeliga and Mohebbi are likely to testify that they told Nacchio they believed Qwest’s publicly announced earnings projections for 2001 were too high and that Nacchio rejected the warnings.
The government will contrast that testimony with Nacchio’s own public statements touting Qwest’s performance.
Nacchio is charged with 42 counts of criminal insider trading for stock sales he made from January to May 2001. He has pleaded not guilty. If convicted, Nacchio faces $42 million in fines and a potential jail term of up to 10 years per count, a sentence likely to be served concurrently for a maximum of 10 years.
The challenge for the government will be to prove that Nacchio intended to defraud when he sold his shares. Prosecutors must convince a jury that Nacchio not only possessed inside information, but that he sold his shares based on that information.
It’s unlikely that Nacchio confided in his colleagues that he was doing anything unlawful.
“Nacchio’s been accused of a lot of things, but nobody has accused him of being stupid,” said Denver attorney and former federal prosecutor Rick Kornfeld.
So proving intent will be left to circumstantial evidence, and jurors will have to make inferences as to Nacchio’s motives. It’s not unusual in white-collar cases, but it provides an opening for Nacchio’s attorneys to plant seeds of doubt.
“The difference between direct testimony and circumstantial evidence is often the difference between reasonable doubt and conviction,” said Anthony Accetta, a Denver-based fraud investigator and former federal prosecutor who is working as a paid consultant on the Nacchio case for The Denver Post.
A straightforward case
The case’s strength lies in its simplicity. It’s a straightforward theory that a jury will easily grasp. Prosecutors will have to support the storyline with strong evidence and keep the jury focused on that evidence.
The government does not have to prove that Nacchio cooked the company’s books. It need not demonstrate that he knew that others were engaging in accounting fraud.
Unlike other high-profile cases, jurors won’t be lulled into a slumber by weeks of testimony by forensic accountants.
“If the government can convince the jury of the macro theory of the case – that Mr. Nacchio knew things weren’t going well so he sold the stock – it has an easier job proving … that this information was used as a basis for his sales,” Kornfeld said.
A potential weakness is that the government was unable to obtain convictions or felony guilty pleas from a cadre of lower-ranking former Qwest officials. Their cooperation or testimony might have buttressed the case.
A fraud trial of four mid-level executives ended without convictions in 2004.
Szeliga pleaded guilty to one count of insider trading and was sentenced to probation based on her cooperation. She is considered the prosecution’s star witness. Mohebbi has been granted immunity for his testimony. Others, such as former Qwest general counsel Drake Tempest, may have received similar deals.
Court documents shed light on what Szeliga and Mohebbi may say on the stand.
Szeliga will testify that Qwest “did not adequately disclose the financial condition of the company” during its analyst calls for the first and second quarters of 2001, according to a February 2005 note from her attorney, Vince Marella, to prosecutors.
Specifically, the company did not disclose that one-time network-capacity swaps with other companies “were a significant driver of growth,” Marella wrote. Because of that, “the public could not assess the extent to which (capacity swaps) attributed to Qwest making its numbers for the quarter” or “the level of risk of Qwest meeting its future projections,” he wrote.
Szeliga told investigators in a July 2005 interview that she told Nacchio on numerous occasions that she thought Qwest’s public earnings projections were too high, and that he rejected her warnings.
“I don’t agree with it”
Mohebbi told a grand jury in November 2005 that he advised Nacchio more than once that he thought Qwest’s earnings estimates were too high, according to filings.
“I heard you. I don’t agree with it,” Nacchio replied, according to Mohebbi. “You don’t know everything that I know. We’re not changing the numbers.”
A central part of Nacchio’s defense is that he alone knew Qwest would receive lucrative contracts from clandestine government agencies, which gave him reason for optimism.
The government has said in filings that Qwest’s classified revenue was less than 1 percent of total revenue in 2001 and thus immaterial to the case.
“From the government’s perspective, that’s a side show. From the defense’s perspective, that may be the show,” Kornfeld said. “The prosecution’s job will be to keep bringing it back to the evidence and not let the side show take over the circus.”
Staff writer Greg Griffin can be reached at 303-954-1241 or ggriffin@denverpost.com.
