Wednesday, December 21, 2005
Ex-Qwest CEO Nacchio charged with insider trading
DENVER (Reuters and AP) - The former head of the United States' No. 4 regional phone carrier, who presided over a $2 billion accounting scandal, was indicted on Tuesday on insider trading charges after a three-year federal investigation.
The indictment handed up by a grand jury charges former Qwest Communications International Inc. (NYSE:Q - News) Chief Executive Joseph Nacchio with selling more than $100 million of Qwest stock in 2001, at a time when he knew the firm would miss its aggressive financial forecasts.
Prosecutors, who have been working to build a case against Nacchio by gaining the cooperation of executives who once worked under him, said the indictment marked the end of their probe.
Nacchio, 56, who lives in New Jersey, flew to Denver late on Monday and surrendered himself into federal custody before being released on a $2 million bond.
He was led handcuffed into a courtroom by two deputy marshals.
Defense lawyer Herbert Stern entered a not guilty plea for Nacchio, and suggested his client would testify in his own defense and left open the possibility he would ask to move the trial out of Denver, where Qwest has its headquarters.
"I'm finally glad to know what I'm shooting for, and I'm looking forward to telling my side of the story," Nacchio told reporters outside the courthouse before leaving for Denver's airport.
Nacchio, who joined Qwest in 1997 and was ousted by the board in June 2002, has repeatedly denied any wrongdoing, including in testimony before a Congressional panel.
Prosecutors are demanding Nacchio forfeit $101 million in what they describe as profit from his insider trading and indicated they would seize other assets if the money could not be located or had been transferred outside U.S. jurisdiction.
Denver-based Qwest, the No. 4 U.S. regional phone carrier and a Wall Street favorite in the late 1990s, has been the focus of legal action since 2002 when it was forced to restate over $2 billion in revenue and earnings for the preceding two years as accounting problems emerged.
The indictment against Nacchio charges him with 42 counts of insider trading.
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.
Each count carries a potential 10-year jail term and corresponds to a sale of Qwest shares, including a flurry in April-May 2001, when Nacchio sold almost $39 million in stock.
At the time, Qwest was trading between $41.12 and $38.31. The stock began a sharp decline in May 2001, falling below $2 by July 2002.
"Beginning as early as August 2000, Nacchio was specifically and repeatedly warned about the material, non-public financial risks facing Qwest and about Qwest's ability to achieve its aggressive publicly stated financial targets," the indictment said. "Nacchio's stock sales accelerated in January 2001 as he became aware of additional material, nonpublic information."
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.
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.
"This looks to me like a pretty straightforward insider trading case," District Judge Edward Nottingham said from the bench.
U.S. District Attorney Bill Leone agreed, but noted that the investigation included 13 million pages of documents.
Source: Reuters & AP
When does this guy get Indicted?