Nacchio appeal claims 'prejudgment, vitriol'

Sara Burnett, Rocky Mountain News

Published October 10, 2007 at midnight

Text size

More Tech & Telecom

Joe Nacchio's attorneys say the former Qwest CEO was indicted, tried and convicted "in an atmosphere of prejudgment and vitriol" and should be acquitted or receive a new trial or a lesser sentence.

In an appeal filed Tuesday with the 10th Circuit Court of Appeals in Denver, Nacchio's lawyers say shareholders who lost "paper fortunes" and employees who lost jobs when Qwest stock plummeted in 2001 and 2002 were angry and demanding "someone to blame."

"That person, it turned out, was the man who built Qwest into a telecommunications giant, and who, despite the vicissitudes of the stock market and the economy, believed more than anyone else in the company's future," the 58-page filing states.

Nacchio was convicted in April of 19 counts of insider trading. In July, he was sentenced to six years in a federal prison and ordered to pay a $19 million fine and forfeit the $52 million prosecutors said he earned from the illegal sales.

The sentence was later stayed by a three-judge 10th Circuit panel, pending his appeal.

At trial, prosecutors argued Nacchio knew when he sold stock between January and May 2001 that Qwest was relying too heavily on one-time sales of space on its fiberoptic network. The CEO knew those sales, used to prop up the company's earnings, weren't sustainable. Yet he opted not to share that information with shareholders, even as he sold his own stock, prosecutors said.

In their appeal, Nacchio's attorneys called the prosecution "unprecedented."

Insider trading cases usually are based on the fact that the insider had "hard" information, such as knowledge of a pending merger or upcoming quarterly earning reports – not on projections of what might happen eight or nine months down the road, as was the case for Nacchio, the appeal states.

It focuses on five areas where Nacchio's attorneys say errors occurred.

First, attorneys argue the evidence at trial was insufficient for a jury to conclude that Nacchio possessed "material" inside information when he made his sales, and that he sold his stock on the basis of that information. Rather, they say testimony showed Nacchio believed Qwest's stock price was too low, and that the information he had did not reveal with any level of certainty that it was about to drop.

Second, the appeal states that the jury received the wrong instructions. Nacchio had requested that jurors be told that forward-looking statements, or long-term financial projections, may not be considered material. Instead the judge instructed jurors that the projections were similar to any other information available to the CEO that a reasonable investor might find important in making a decision on whether to sell.

Third, Nacchio's attorneys say the court should have allowed Daniel Fischel, a defense expert, to testify on the former CEO's behalf about the materiality of the information. Fischel, a nationally known expert who has testified in many trials, has never been prevented from taking the stand before, attorneys argued, adding that his testimony would have been critical to Nacchio's defense.

Nacchio's fourth issue on appeal deals with his classified information defense, and that section of the appeal was filed under seal, so it is not available to the public. But Nacchio has said in the past that one of the reasons he was so optimistic about Qwest's future was because he had knowledge of secret government contracts the telco was set to receive – an account the government disputes. Nacchio never presented that defense at trial, in part because Judge Edward Nottingham ruled during closed hearings that some of the information could not be presented.

Nacchio's final argument is that the government and the court miscalculated the actual gain Nacchio enjoyed from selling on the inside information. Nottingham put that gain at $28 million – the gross of $52 million minus costs. He then used that dollar amount to determine the sentence, according to federal guidelines.

Nacchio attorneys say the gain instead was closer to $1.8 million, or the amount a defense-hired expert determined was attributable to the information, and that his sentence should have been less.

The government has until November to respond to the appeal.

The 10th Circuit is scheduled to hear oral arguments on Dec. 18 in Denver.

Subscribe to the Rocky Mountain News