DENVER-
Contrasting pictures of Joe Nacchio emerged Tuesday as a prosecutor said the former Qwest Communications CEO illegally sold stock and a defense attorney insisted Nacchio was forced to sell the shares but believed in the telephone company’s financial future.
The two gave opening statements after a jury was seated for the trial in which Nacchio is accused of selling more than $100 million worth of stock in the first five months of 2001 amid warnings that Qwest Communications International Inc. could be headed for financial trouble.
“This is a case about cheating,” Assistant U.S. Attorney James Hearty told jurors. “He sold $100 million worth of Qwest stock when he knew about problems at Qwest—problems that people outside Qwest did not know.”
Nacchio’s case, Hearty said, “is based on a very simple principle—fairness. Corporate insiders are in a position to take advantage of information people outside don’t know.”
Nacchio sold no stock based on insider information and always acted in good faith in his dealings with Wall Street, Stern said. Nacchio’s stock options were due to expire and the board refused to extend the deadlines.
Nacchio based his projections in part on analyses by investment banking houses Donaldson, Lufkin and Jenrette and Lehman Bros., Stern said.
Nacchio “believed passionately, firmly and honestly in the public financial targets of his company,” Stern argued, adding that Nacchio’s stock sales were wholly consistent—and in part motivated by—terms of his contract with Qwest founder Phil Anschutz.
Qwest executives who voiced concern about the Denver-based company’s future were worried about performance bonuses contingent on internal goals but not the publicly stated financial targets, Stern contended.
“We’re going to demonstrate and show and prove to you that the accusations in this case are false,” he said.
Nacchio, sitting near one end of the defense table, grew emotional and wiped his eyes with a handkerchief as Stern told jurors he once was an AT&T Inc. executive who Anschutz sought out to lead Qwest. Part of Nacchio’s employment contract, Stern said, allowed him to travel home to New Jersey where his son was suffering serious emotional problems.
Nacchio, 57, is accused of improperly selling the stock while privy to nonpublic information indicated that Qwest was at financial risk. The company, which provides phone service to 14 mostly Western states, soon after became mired in an accounting scandal and eventually restated $2.2 billion in revenue.
Nacchio is charged with 42 counts of insider trading. Each count carries a penalty of up to 10 years in prison and a $1 million fine.
Hearty claimed that in late 2000, Nacchio became aware of problems Qwest would be facing in 2001, and that Qwest stood to fall far short of financial targets it had set publicly.
Still, Hearty claimed, Nacchio repeatedly “told investors that everything at Qwest was great.”
“Mr. Nacchio sold many more shares of Qwest stock during this time period than he had ever sold before. In the first five months of 2001, Mr. Nacchio sold 250,000 more shares than he had in the previous 18 months combined,” Hearty said.
Share prices for Qwest plummeted from more than $60 a share in 2000 to just $2 a share in 2002, and its near-collapse left thousands of pensioners in financial straits.
Hearty outlined a pattern in which he said Nacchio repeatedly was warned by Qwest executives that the company could not support the growth target that he continued to give Wall Street. All the while, Hearty said, Nacchio was secretly selling his own Qwest stock.
“Joe Nacchio told the public that Qwest was different from its competitors, who were struggling,” the prosecutor said. “He told investors that he was very confident that Qwest would achieve the high growth rates that he told them to expect. But at the same time, he was being told different information from (executives) at Qwest.”
“Joe Nacchio kept those risks from investors as he sold his stock faster than he ever sold it before.”
Stern countered that documents being used by prosecutors to depict Qwest’s public growth advisories were in fact about internal budgets. Figures in those documents, he said, were designed “as aspirational goals within Qwest in order to energize and get the people working at Qwest to exceed the public guidance.”
He characterized the Qwest executives’ warnings to Nacchio as “internal crying” and “complaining” because their own bonuses were tied to Nacchio’s high internal expectations—not the public advisories.
Unlike the executives, Nacchio was aware of “classified information about … work he believed was available to Qwest,” Stern said—an apparent reference to defense claims the ex-CEO was optimistic about Qwest’s future because he expected it to win lucrative contracts from clandestine government agencies.
Stern promised that the defense would account for all of Nacchio’s stock sales and that they were timed in part by Nacchio’s contract with Anschutz—not inside information. Nacchio also was being urged by his personal financial advisers to diversify his portfolio, and in some cases he faced the loss of stock options set to expire, Stern said.
