DENVER-
One by one, the people former Qwest Communications CEO Joe Nacchio relied on to help build the regional telephone company into a telecommunications powerhouse will testify against him.
Similar to the fraud cases involving WorldCom and Enron Corp., prosecutors have lined up lower-level managers and executives to tell jurors in Nacchio’s insider trading trial of his actions and beliefs when he sold $101 million worth of Qwest stock in 2001.
The strategy is designed to convince jurors Nacchio sold the stock even though he was aware of internal information that could put the Denver-based company at financial risk, legal analysts say.
“The focus is how much can they (prosecutors) put into Nacchio’s mind,” said Peter Henning, a Wayne State University law professor who specializes in white-collar crime.
Nacchio, 57, who resigned from Qwest under pressure in 2002, is charged with 42 counts of insider trading stemming from stock sales in the first five months of 2001. Each count carries a penalty of up to 10 years in prison and a $1 million fine.
Testimony was scheduled to enter its second week Monday in U.S. District Court.
Prosecutors say Nacchio completed the transactions shortly after he learned that Qwest Communications International Inc., a telephone service provider in 14 mostly Western states, could be at financial risk.
Soon after, Qwest became mired in an accounting scandal and eventually was forced to restate $2.2 billion in revenue.
The government’s case is grounded in 2000 and 2001, when Qwest acquired former Baby Bell U S West Inc.
Federal regulators say Qwest falsely reported sales of capacity on fiber optic cables as recurring instead of one-time revenue between April 1999 and March 2002.
That allowed the company to improperly report approximately $3 billion in revenue, which helped pave the way for its 2000 acquisition of U S West Inc., the Securities and Exchange Commission has charged.
In white-collar crime cases, prosecutors often try to file charges against lower-level managers with the goal of gaining their cooperation against top executives, legal analysts say.
In the WorldCom case, Scott Sullivan, a former WorldCom chief financial officer, pleaded guilty to his role in an $11 billion accounting fraud that brought down the company. He testified against former CEO Bernard Ebbers, who was convicted of fraud, conspiracy and false regulatory filings.
At Enron Corp., former CFO Andy Fastow pleaded guilty to two counts of conspiracy and testified against Enron founder Kenneth Lay and former President Jeffrey Skilling, who were convicted of fraud, insider trading and other charges in the collapse of the Houston-based firm. Lay’s conviction was vacated after his death in Aspen last year.
In the Qwest case, former CFO Robin Szeliga, who is serving probation after pleading guilty to one count of insider trading, is expected to be a key witness for the government.
Others include former investors relations executive Lee Wolfe, who testified last week. He admitted selling stock in the same time period as Nacchio but has a letter from the government essentially granting him immunity if he cooperates. Former President Afshin Mohebbi and former General Counsel Drake Tempest also are expected to testify.
Tony Leffert, a former federal prosecutor in private practice in Denver, said the Nacchio case is a bit unusual because of the number of people who knew internally that Qwest was using revenue from one-time sales to meet financial targets. “I think that it makes the case stronger from the prosecution standpoint because it shows knowledge and intent on the part of the defendant,” he said.
Scott Robinson, a defense attorney who is monitoring the trial, notes that although the prosecution has some strong witnesses lined up, Nacchio’s defense has yet to present its case.
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.
“It’s really too close to call,” Robinson said.
