Ex-Qwest CEO Convicted Of Insider Trading

Joe Nacchio, a former AT&T executive tapped to transform Qwest Communications into a major telecommunications competitor, was convicted of 19 of 42 insider trading charges Thursday after one-time top executives described his relentless drive to meet revenue projections without revealing financial risks.

The eight men and four women deliberated six days before returning the verdict, concluding on 19 counts that the former Qwest chief executive illegally sold stock in the first five months of 2001 when he knew the Denver-based company faced financial challenges and relied heavily on one-time sales to meet revenue targets.

U.S. District Judge Joe Nottingham set a July 27 sentencing date for Nacchio, who is free on $2 million bond. Each of the counts carries a potential penalty of 10 years in prison and a $1 million fine.

"'Convicted felon Joe Nacchio' has a very nice ring to it," boasted Troy Eid, the U.S. attorney for Colorado.

"We certainly will appeal," said defense attorney Herbert Stern.

Nacchio, who still faces a civil fraud suit, declined comment. A smile sometimes crossed his face as he left the federal courthouse arm-in-arm with his wife. They walked away together on a busy downtown street.

Nacchio, 57, was accused of selling $101 million worth of stock over a five-month period in early 2001 based on inside information that Qwest faced financial risks. With the decision, the jury turned away Nacchio's claim that he believed in the company's future despite concerns voiced by his business managers.

The criminal case stemmed from a years-long government investigation into an accounting scandal at Qwest, a Denver-based primary telephone service provider in 14 mostly Western states.

Federal regulators have said Qwest falsely reported fiber-optic capacity sales as recurring instead of one-time revenue between April 1999 and March 2002. The practice allowed Qwest to improperly report about $3 billion in revenue, which helped pave the way for its acquisition of former Baby Bell U S West Inc., regulators have alleged. Qwest later restated about $2.2 billion in revenue.

A civil fraud suit is still pending against Nacchio, former company president Afshin Mohbebbi and other one-time executives, alleging they orchestrated a financial fraud that led to the scandal.

The SEC is seeking repayment and civil penalties, with the amounts to be determined at trial. One defendant has reached a settlement with regulators. Two defendants, former finance chief Robin Szeliga and Gregory Casey, a former vice president of Qwest's wholesale business unit, have settled with the SEC.

Prosecutors wove a circumstantial case based on the testimony of those who worked closely with Nacchio: a former company president, a one-time chief financial officer, an investor relations executive and business unit managers.

Most testified either under grants of immunity in exchange for cooperation or after pleading guilty to a crime, saying they repeatedly warned Nacchio that Qwest would not meet aggressive financial targets for 2001 without relying heavily on revenue from one-time sales — and that revenue came from a waning market.

Despite their warnings, Nacchio refused to lower forecasts and did not tell the public how much one-time revenue was included in earnings, the witnesses said.

Nacchio's attorneys narrowly tailored their defense, arguing the ambitious entrepreneur believed Qwest would succeed despite the warnings. They said Nacchio had to sell the shares under terms of his employment contract, particularly 350,000 growth shares sold in early January 2001 for a little more than $14 million, because the company chose to give him shares instead of cash he was owed.

Before trial, defense attorneys argued that Nacchio, through his membership on two government panels, was alone among Qwest executives who knew the company could receive lucrative contracts from clandestine government agencies. At trial, attorneys didn't present any direct evidence about classified information.

Nacchio's defense presented just three witnesses. Qwest founder Phil Anschutz and a Roman Catholic abbot testified Nacchio wanted to resign in January 2001 to remain in New Jersey with his family after a son attempted suicide.

The third witness was Daniel Fischel, an author and Northwestern University professor, whose testimony about Nacchio's pattern of stock sales was designed to counter prosecutors' argument that Nacchio accelerated his trades ahead of the worsening financial picture at Qwest. His calculations excluded so-called growth shares that Nacchio sold on Jan. 2 and Jan. 3, 2001.

A former AT&T executive, Nacchio was recruited to transform Qwest from a construction company building a fiber-optic network into a telecommunications leader at a heady time for the industry when companies were scrambling for lucrative telephone and Internet customers.

Nacchio oversaw Qwest's entry into public trading and its 2000 takeover of U S West Inc., fostering a new, more aggressive atmosphere where the priorities were not just meeting but exceeding financial targets and following a so-called "golden rule" of never saying anything to cause the stock price to drop, witnesses testified.

Nacchio forecast revenue growth of 15 percent to 17 percent in 2001 and set internal projections even higher, pushing business unit managers to exceed them.

As the telecommunications market began to soften amid aggressive competition in late 2000, competitors expressed concern that there was not enough business to fill the growing number of fiber-optic networks carrying voice and data traffic.

In the fall of 2000, Qwest managers warned Nacchio the 2001 financial targets were unrealistic and unattainable. But the CEO refused to reduce internal numbers or lower the forecast, they said. One manager called a final meeting on Qwest's 2001 budget a "sign in blood" session where division managers signed up to meet the targets.

A key point in the prosecution's case was Nacchio's decision to sign an irrevocable commitment in late 2000 to sell the so-called growth shares.

Prosecutors said he decided to sell after hearing worsening news from business managers in early December 2000 but backdated the sales document to Nov. 3, 2000. Defense attorneys insisted that Nacchio gave oral instructions committing to sell the shares in November and that the document was drafted at a later time.

The remaining transactions involved vested stock options that Nacchio exercised and sold from Jan. 26, 2001, to May 29, 2001. About one-third of the overall amount was sold from April 24 to April 27, just weeks after the company issued its first-quarter results.

As Qwest's competitors reduced their financial forecasts late in 2000 because of the weakening market, Nacchio continued to reaffirm his company's guidance.

Two analysts testified that they repeatedly asked how Qwest was meeting its numbers but didn't learn until August 2001 how heavily the company relied on one-time sales to achieve them.