The government will prove that former Qwest chief executive Joe Nacchio deceived investors about the company’s deteriorating finances in late 2000 and early 2001 while he unloaded more than $100 million in stock, a federal prosecutor told jurors during opening arguments today in Nacchio’s insider-trading criminal trial.
“When Mr. Nacchio saw a storm coming at Qwest he sold as much stock as he could, as quickly as he could,” assistant U.S. attorney James Hearty told the 11-man, 7-woman jury.
Nacchio is charged with 42 criminal counts of insider trading and has pleaded not guilty. If convicted he faces a maximum of 10 years per count, sentences that likely would be served concurrently.
His trial began Monday with jury selection, which ended at about 11 a.m. today.
“We will prove that the playing field was not level,” Hearty said. “There would have been no problem with Mr. Nacchio selling that stock if he had told investors outside Qwest … about the problems that he knew about.”
Those problems were:
—In September 2000 Nacchio set aggressive new earnings targets for Qwest – against the advice of his investor relations chief – and he later confirmed those targets despite clear signals and warnings from other executives that they were too high.
—Qwest predicted revenue growth rates at two to three times its competitors’, but when other telecommunications companies told investors in late 2000 that their revenue growth was faltering, Qwest stood by its numbers. Its stock shot up.
—Chief financial officer Robin Szeliga told Nacchio the targets were too high by $1 billion, roughly 40 percent of the $2.5 billion in total growth in revenue Nacchio had forecast..
—The targets relied on significant growth in Qwest’s recurring revenue, even though the company increasingly relied on “one timers,” single-transaction sales of fiber-optic network capacity.
—Qwest executives warned Nacchio in December 2000 that the company would not make its 2001 targets without strong growth in recurring revenue at the start of 2001. But recurring revenue fell 19 percent during the first quarter. Nacchio still confirmed the targets during an April 25 earnings call.
—Nacchio was told that the value of Qwest’s “one timers” was dropping, and that there would not be any big one-time transactions during the second half of 2001.
Hearty called the government’s case against Nacchio “simple” and “straightforward.” He told jurors they will hear from “key players” on Nacchio’s management team including Szeliga, former president and chief operating officer Afshin Mohebbi and former head of investor relations Lee Wolfe, each of whom warned Nacchio that the company had set its 2001 earnings targets too high.
During his 90-minute presentation to jurors, Hearty went through a timeline of meetings and events at Qwest from September 2000 to May 2001, and highlighted Nacchio’s stock trades during that time.
A former federal prosector who sat through the government’s opening statement said it was strong on content.
“For style points, I give it a low rating, but for content it was very high. And content trumps style,” said Tony Accetta, a fraud investigator in Denver who is working for The Denver Post as a legal analyst during the trial.
“If they produce what they said they will produce, they will have the smoking gun that takes this out of a circumstantial evidence case and make it a direct-evidence case that makes for a much higher probability of conviction.”
Nacchio defense attorney Herbert Stern began delivering his opening statements shortly before 2 p.m.
Early in his remarks, he called the government’s allegations “lies” and said Nacchio intentially set earnings projections $700 million above the realistic level during the budgeting process in late 2000 to push unit heads to exceed expectations.
Among the evidence that Hearty touched on during his presentation was a note that Nacchio signed Dec. 13 instructing a stock broker to sell more than 350,000 shares on Jan. 1 and 2, 2001. He indicated he was not aware of inside information at the time he signed it. But Hearty said Nacchio backdated the document, putting a date of Nov. 3 on it.
“What had happened since Nov. 3?” Hearty asked. “All those meetings with division heads warning him that the targets were too high. He received Mr. Mohebbi’s first memo,” warning that Qwest’s revenue targets were a “huge stretch” and that recurring revenue would have to take off quickly to have a chance to meet the targets.
Hearty said the government has substantial evidence that Nacchio accelerated his stock sales from January to May 2001, at the same time he was withholding Qwest’s problems from investors.
Nacchio implemented a stock-sales plan Feb. 15 under which he would exercize 11,500 stock options each trading day for 2 ½ years. The plan allowed Nacchio to diversify his portfolio and sell stock during periods that regulators don’t allow insider stock sales.
But he cancelled the plan March 1. When he resumed sales during the allowed period from April 26 to May 15, he sold $49 million in Qwest stock, far more than his plan would have allowed, Hearty said. From Feb. 20 to May 29, Nacchio sold $55 million in shares, while his plan would have allowed sales of just under $30 million.
“Mr. Nacchio’s plan solved all his problems but one. It didn’t alow him to sell his shares fast enough,” Hearty said.
Hearty pointed to several conference calls with analysts during which he optimistically touted Qwest’s financial projections.
“Mr. Nacchio tells investors how well Qwest is doing even though he knew they had missed their recurring revenue plan by almost 20 percent …Those problems were kept inside Qwest. People outside did not know. He told everyone Qwest was doing great,” Hearty said. “Mr. Nacchio never backs off those high growth projections throughout the time he’s selling his stock in 2001, despite the fact he has been warned repeatedly that the projections are too high.”
