DENVER-
Quarter after quarter, Joe Nacchio confirmed to analysts that Qwest Communications was growing with data and Internet product sales, but he never mentioned it came largely through one-time transactions, a former company executive testified at Nacchio’s insider trading trial Wednesday.
While the then-Qwest CEO was expressing optimism about his company, others in the industry were concerned that there was not enough business to fill a growing number of fiber optic networks that carry voice and data, Lee Wolfe, then senior vice president of investor relations, told jurors.
“I expressed some concern to Mr. Nacchio not to be as aggressive in the targets,” Wolfe testified. “It was apparent to me it was not sustainable.”
Nacchio is accused of illegally selling $101 million of stock based on non-public information. Prosecutors contend Nacchio dumped the stock in the first five months of 2001 because he knew that Qwest Communications International Inc. could be in financial trouble.
Guided by prosecutor Leo Wise, Wolfe took jurors through a period from just after Qwest acquired former Baby Bell U S West through September 2001. He detailed conversations Nacchio had with analysts and investors, reassuring them that the Denver-based telephone company would generate 15 percent to 17 percent revenue growth within five years after the 2000 merger.
About the same time, others in the industry had lowered forecasts because of economic worries and the increased competition facing network owners.
Wolfe said he believed the revenue increases at Qwest were driven by one-time transactions. “The problem with one-timers is you have to repeat them each quarter and actually do a little more (in revenue),” he said.
Nacchio, however, made the decision not to discuss the transactions, he said.
In December 2000, Nacchio reaffirmed the company’s growth projections during a conference call with analysts, Wolfe said. Shares of Qwest Communications International Inc. rose $5 on the day of the call and gained an additional $5 a share within five trading days.
Nacchio sat watching closely as Wolfe took jurors through a series of memos and other company documents.
On Tuesday, Wolfe testified that there was a “golden rule” at Qwest—never to take any action that would hurt the stock price—something Nacchio communicated to employees.
Nacchio, 57, is accused of 42 counts of insider trading for improperly selling stock while privy to internal information that indicated Qwest was at financial risk. Each count carries a penalty of up to 10 years in prison and a $1 million fine.
Qwest’s stock price 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 trouble. An accounting scandal forced the company, which provides phone serve to 14 mostly Western states, to restate $2.2 billion in revenue.
Nacchio’s attorney has said his client “believed passionately, firmly and honestly in the public financial targets of his company” and was reluctant to sell shares in early 2001. Attorney Herbert Stern declared during his opening statement Tuesday that Nacchio had asked the board for an extension of a deadline to sell stock options, but was turned down.
The defense said in a court filing that it has added Richard Clarke, a former White House anti-terrorism chief, to its witness list. Clarke, who also served as a special advisor to President Bush on cybersecurity issues, had spoken at least once to the National Security Telecommunications Advisory Committee, which Nacchio headed when he resigned from Qwest in 2002.
An earlier defense filing that included notes of a federal prosecutor’s interview of a former Qwest manager said Nacchio and about 15 others met with Clarke and then-National Security Adviser Condoleezza Rice in the White House situation room in March 2001. Clarke asked whether it would be possible to create a government communications network separate from the public network, and Nacchio said “not only was it possible, but he had already done it. He went on to describe how he would do it and there was debate on the subject. Others argued it would be prohibitively and outrageously expensive,” the filing said.
The defense contends Nacchio was aware of secret, potentially lucrative government contracts that Qwest could win and the money would help the company’s financial picture.
