DENVER-
Prosecutors rested their case against former Qwest CEO Joe Nacchio on Wednesday after more than a dozen company managers, industry analysts and others testified they were worried about looming financial challenges at the time Nacchio was selling $101 million in stock.
Defense attorneys will open their case Thursday by calling Qwest founder Philip Anschutz who hired Nacchio to head Qwest prior to its acquisition of U S West Inc.
By next week, they are expected to begin introducing evidence about classified business contracts from secret agencies, a key part of Nacchio’s strategy.
U.S. District Judge Edward Nottingham sent the jurors home early and addressed a series of pending motions. He rejected a defense request for summary judgment saying there was enough evidence of nonpublic information to allow a jury to decide the insider trading case.
He told defense attorneys that forward-looking statements published by a company that warn of potential risks cannot be used as a protection against an executive’s decision to withhold information from the public.
In addition, prosecutors presented evidence “that the jury could believe that the defendant was constantly told in the most colorful language that the nonrecurring revenue would not close the gap.”
He also discounted a defense argument that some internal information can be kept from investors because of proprietary concerns. “You can’t violate the securities laws by claiming that material inside information is proprietary and should not be made public,” he said.
In the past 10 days, jurors have heard from a series of one-time Qwest business division managers and executives in Nacchio’s inner circle who described a tense atmosphere at Qwest in 2000 and 2001 after it acquired former Baby Bell U S West Inc. They said Nacchio emphasized meeting what they considered unrealistic targets, along with keeping the company’s stock price up.
Prashant Khemka, a Goldman Sachs asset manager, testified Wednesday that Nacchio said the company would achieve its projection of 15 percent to 17 percent revenue growth but did not explain it would use a significant portion of one-time sales revenue to achieve them.
Khemka said he became increasingly frustrated in 2001 when he could not get satisfactory answers about the company’s reliance on one-time sales. “We had been raising questions all along and not getting answers to them,” he said.
In a letter sent to Nacchio in the summer of 2001, Khemka told the chief executive Qwest had a credibility issue and called 2001 a year of “failed promises and unpleasant shocks.”
“The lack of transparency is going to hurt you because investors don’t know how many cockroaches you still have in your bag,” Khemka wrote.
The use of one-time sales to meet revenue targets is a critical component of the government’s overall investigation of Qwest.
In a separate civil lawsuit, federal regulators have said Qwest falsely reported one-time sales as recurring revenue between April 1999 and March 2002, which allowed the company to improperly report approximately $3 billion in revenue to help acquire U S West. Qwest later restated about $2.2 billion in revenue.
For example, one-time sales of capacity on Qwest’s fiber-optic network accounted for 39 percent of revenue growth in the first quarter, prosecutors have said.
Based in Denver, Qwest is the primary telephone service provider in 14 mostly Western states.
Nacchio, 57, 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.
Prosecutors maintain Nacchio kept issuing optimistic advisories to investors and analysts while dumping his stock.
The defense says Nacchio had to exercise stock options under terms of his contract but was optimistic about the company’s future because he anticipated lucrative contracts with clandestine government agencies.
