DENVER—Former Qwest chief Joe Nacchio, facing prison time on an insider-trading conviction, has denied allegations he participated in a massive fraud that triggered a multibillion-dollar accounting scandal at the telecommunications company.
Nacchio’s attorneys submitted his formal answer to the federal civil complaint filed more than two years ago, but its proceedings have been delayed by his criminal case.
The Securities and Exchange Commission case mirrors many of the issues that arose during his criminal trial, charging that Nacchio and other one-time executives concealed the amount of money from one-time sales of capacity on its fiber optic network that was used to meet revenue targets.
The SEC has said the fraud occurred between April 1999 and March 2002, allowing Qwest to improperly report approximately $3 billion in revenue that helped pave the way for its 2000 acquisition of former Baby Bell U S West. The phone company later restated $2.2 billion in revenue.
The SEC wants repayment and civil penalties, with amounts to be determined at trial.
In a 38-page brief filed late Tuesday in U.S. District Court, Nacchio denied the allegations, paragraph by paragraph, and asked for a jury trial.
As part of his defense, Nacchio said knew the company could be in line for lucrative business contracts from clandestine government agencies but the details remained private under a federal law that restricts public release of classified information.
“This top-secret information was part of the mix of information which allowed Nacchio to have a reasonable, good-faith belief that Qwest would be able to achieve its annual publicly stated financial guidance, even when those not privy to the classified information might have questioned Qwest’s ability to achieve said guidance,” attorney Herbert Stern wrote.
The classified information strategy was mentioned by Nacchio’s criminal defense attorneys beforehand but was not used during the insider-trading trial. The bulk of the debate about the issue remains secret under the Classified Information Procedures Act.
A federal jury convicted Nacchio on April 19 of illegally selling about $52 million of stock during April and May of 2001 while not telling investors Qwest was at financial risk.
The guilty verdicts involved 19 transactions that occurred after Qwest released its first-quarter results without publicly stating how much of the revenue target was met with one-time sales. The jury acquitted Nacchio of 23 counts involving transactions that between January and March 2001.
When he is sentenced July 27, Nacchio faces a penalty of up to 10 years in prison and a $1 million fine on each count. Any forfeiture that is ordered would be in addition to the fines. Nacchio plans to appeal his conviction.
The SEC case has moved glacially slow because the judge sought to protect Nacchio’s fair-trial rights by delaying most depositions and evidence exchange pending the conclusion of the insider trading case.
Qwest paid $250 million to settle SEC charges of fraud in a deal that did not cover individuals. Qwest did not admit any wrongdoing in the settlement.
In addition to Nacchio, the remaining defendants in the SEC case include former Qwest President Afshin Mohebbi; former Chief Financial Officer Robert Woodruff; and former Qwest accountants James Kozlowski and Frank T. Noyes.
Former CFO Robin Szeliga and former Qwest executive Gregory Casey have reached separate settlements with the SEC.
