Secret U.S. Data May Be Key in Case of Ex-Chief at Qwest

After a three-year investigation into a $2-billion accounting scandal at Qwest Communications International Inc., federal prosecutors distilled their long-running case last week to a simple allegation of insider trading against the former chief executive.

But the high-profile defense team of former Qwest Chief Executive Joseph Nacchio is readying a strategy that rests in part on secret government documents as evidence, legal analysts said.

Lawyers for Nacchio appear ready to argue that he believed that Qwest was in line for lucrative security contracts in 2001 that would have strengthened the telephone company’s financial outlook when he unloaded $100 million in stock.

Legal analysts described the tactic as an attempt to show jurors that the financial prospects for the fourth-largest U.S. telephone carrier were not obviously worsening at that time.

Nacchio, 56, was indicted Dec. 20 by a federal grand jury on 42 counts of insider trading. Nacchio, who is free on a $2-million bond, pleaded not guilty and said he welcomed the opportunity to clear his name.

One of his attorneys, former federal judge Herbert Stern, said he would petition the U.S. government for the release of classified national security information to defend his client.

Nacchio was a member of two government advisory committees relating to the telecommunications industry, but it was unclear whether those positions were related to the contracts in question.

Former Denver prosecutor and legal analyst Craig Silverman said regardless of whether contracts were in the offing for Qwest, the stock transactions still were motivated by inside information. But he said the defense tactics could still succeed.

“If the classified information is not allowed in and he’s convicted it could be an appeal issue. If it is allowed in, it could be persuasive to some jurors,” he said.

The company had to restate $2 billion in revenue in 2002 from the two preceding years. The fallout from the accounting scandal triggered both civil and criminal legal action against Qwest and its former executives.

Six other former Qwest executives have been criminally charged in the alleged revenue-boosting scheme.

The prosecution’s case against Nacchio is expected to include other executives testifying against their former boss.

Among those are former Qwest President Afshin Mohebbi, who has been given immunity in return for his cooperation, and former Chief Financial Officer Robin Szeliga.

Szeliga pleaded guilty last summer to one count of insider trading and agreed to cooperate with investigators.

After failing to get convictions for four mid-level Qwest executives in 2003, prosecutors appeared to focus on Nacchio, said Denver defense lawyer Scott Robinson, a legal analyst.

Robinson said it made sense for prosecutors to narrow the case against Nacchio to just the insider trading charge after failing to get convictions in the more complicated 2003 cases.

“They have simplified the issue to whether Mr. Nacchio knew certain things and was using it to his advantage, which could be apparent to even the least sophisticated juror,” Robinson said.

But Robinson said that by not giving a jury any other charges to consider, the government ran the risk of “simplifying itself out of a conviction” if it failed to make a compelling case.

The Securities and Exchange Commission sued Nacchio and other former Qwest executives in civil court in March, claiming they orchestrated a $3-billion fraud by overstating the company’s financial picture from April 1999 to March 2002.

In filings responding to the SEC lawsuit, Nacchio said he was merely engaging in “puffery” in making his projections for Qwest rather than “the stuff of securities fraud.”