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Former Qwest CEO Joe Nacchio indicted on insider trading charges

Wednesday, December 21, 2005

DENVER -- A federal grand jury indicted former Qwest Communications chief executive Joseph Nacchio Tuesday on 42 counts of insider trading accusing him of illegally selling $101 million in company shares after privately learning that Qwest might not meet its financial goals.

Nacchio, 56, appeared in court a few hours after the indictment was announced and pleaded not guilty before being led away in handcuffs. Freed a short time later on $2 million bond, he told reporters he was relieved to finally see the case against him.

"It's pretty tough for four years to have to sit back and let everybody take shots at you," he said outside the federal courthouse, not far from Qwest's headquarters in downtown Denver.

The criminal charges are the first against Nacchio in the government's lengthy investigation of Qwest Communications International Inc., the telephone service provider for 14 mostly Western states that only now is recovering from a multibillion-dollar accounting scandal.

With Nacchio's indictment, federal prosecutor William Leone said, that investigation is virtually complete.

"It's important for corporate executives to recognize that when they're in possession of information that the general public is not in possession of, they're under a duty to abstain from trading," Leone said. "Failure to honor that rule impairs confidence in our markets."

U.S. magistrate Patricia Coan said Nacchio could be released on $2 million bond. Prosecutors did not seek to have him detained.

, though Nacchio was ordered to surrender his passport as a condition of his release.

Each count carries a penalty of up to 10 years in prison and a $1 million fine. Nacchio also faces fraud charges filed by the Securities and Exchange Commission and a number of shareholder lawsuits.

The indictment accuses Nacchio of selling $101 million worth of company stock in the first five months of 2001 when he allegedly had insider information. The sales took place in 42 transactions ranging from $191,000 to $13.6 million each.

The indictment blames Nacchio for "a manipulative and deceptive" scheme to commit fraud and says he was "specifically and repeatedly warned" about the financial risks facing his company just five months before the stock trades in question.

Prosecutors refused to discuss who allegedly warned Nacchio about revenue problems at Qwest or who might testify at trial.

"It's not our intention today to unveil or talk about the evidence," Leone said.

The government has said in both civil and criminal complaints that Qwest and some of its former executives participated in a massive financial fraud between April 1999 and March 2002 by falsely reporting one-time sales or trades of capacity on its fiber-optic cables as recurring revenue.

The fraud allowed Qwest to improperly book approximately $3 billion in revenue that eased its 2000 merger with U S West Inc. and it allowed various executives to reap millions in "ill-gotten" profits, the government has said. Qwest later restated earnings from 2000 and 2001 to erase about $2.2 billion in revenue.

The indictment said Nacchio was aware of Qwest's "extremely aggressive" financial targets and that to meet those targets in 2001 the company would have to significantly boost its flagging "recurring revenue business."

It said he also knew there wouldn't be enough revenue from other sources to "close the gap" between Qwest's publicly stated goals and its actual performance.

Nacchio has denied any wrongdoing, telling members of Congress in 2002 that he made stock sales believing the company's financial statements always represented "a full and accurate picture of its financial condition." He has already asked a judge to throw out the SEC complaint, saying the allegations are "not the stuff of securities fraud."

Prosecutors have lined up some of Nacchio's former colleagues to testify, including former Chief Financial Officer Robin Szeliga, who pleaded guilty to insider trading for a 2001 stock trade, and former sales executive Gregory Casey. Both Szeliga and Casey have settled SEC charges against them.

During a criminal trial last summer for four former Qwest midlevel managers, Szeliga said there was significant pressure from Nacchio to meet financial targets -- enough to create a "pressure-cooker" atmosphere.

In addition, former Qwest President Afshin Mohebbi has been granted immunity and is expected to testify should the case go to trial. Mohebbi's attorney, Paul Grand, has said Mohebbi will not face criminal charges but declined further comment.

A former AT&T executive, Nacchio was hired to head Qwest in 1997 when it was installing fiber-optic networks along railroad rights-of-way. He attracted Wall Street's attention after engineering Qwest's acquisition of U S West but resigned under pressure in June 2002, about eight months before Qwest restated revenue for 2000 and 2001.

Jacob Frenkel, a former federal prosecutor and former lawyer for the SEC, said the absence of charges accusing Nacchio of manipulating company earnings was striking.

"With the amount of time that has passed in this investigation, we must assume that the government has taken its best shot and this is it," he said. "The government has put its bullet in the chamber and it has fired. We're going to find out at trial if they hit or miss."

Last month, Qwest said it would pay $400 million to settle the claims of tens of thousands of shareholders who purchased Qwest securities. The deal does not cover Nacchio and former CFO Robert Woodruff. Qwest earlier agreed to pay $250 million to settle SEC charges of fraud without admitting wrongdoing.


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