Prosecutors: Qwest had a pact

Assertion shoots hole in Nacchio's secret info stance

David Milstead, Rocky Mountain News

Tuesday, October 23, 2007

Prosecutors fought ex-Qwest CEO Joe Nacchio's charge of government retaliation by pointing out that Qwest actually got a piece of the business Nacchio's attorneys say was lost.

The argument, contained in court documents released Monday, was part of the U.S. Attorney's attempts to combat Nacchio's proposed classified-information defense.

Nacchio claimed that Qwest lost a big contract from the National Security Agency called "Groundbreaker" because the Denver telco refused to go along with a phone spying program. That was to be his explanation for why Qwest didn't get the millions of dollars in business that only he knew would help the company meet its earnings goals.

Nacchio was convicted last spring on 19 counts of insider trading for $52 million of stock sales in April and May 2001 and sentenced to six years in prison. He's free pending appeal, which will be heard before the 10th Circuit Court of Appeals on Dec. 18.

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

The classified-information defense was to have shown Nacchio knew Qwest would hit those targets because of secret government contracts that only he knew about.

Nacchio never used the arguments at trial because U.S. District Judge Edward Nottingham precluded them.

"The Court believes . . . that the inference of a causal connection between Mr. Nacchio's refusal and the fact that Qwest didn't end up with the contract is extremely weak," Nottingham ruled on Dec. 8, according to the prosecution papers.

Nottingham added that any reason for subsequently losing an expected contract has no bearing on Nacchio's state of mind at the time of his stock sales.

In the document released Monday, originally filed Feb. 22, prosecutors went on to say that Nacchio's claim that Qwest was "left off the list of subcontractors" was false. This "only strengthens the court's conclusion," they say.

Nacchio apparently submitted a 2001 press release from Computer Sciences Corp. that listed Northrop Grumman as its partner on the $2 billion Groundbreaker project. It named three other companies - none Qwest - as "Strategic Alliance Partners" on the project. Qwest was also left off a list of technology and service delivery partners in the press release.

However, prosecutors submitted a document from the project that listed Qwest as one of 32 strategic vendors on the project.

The partially redacted documents were filed under seal before, during and after Nacchio's trial. Documents filed by Nacchio's defense team were unsealed Oct. 10.

Nacchio attorney Herbert Stern did not return a message left at his offices after 5 p.m.

USA Today reported in May 2006 that Qwest, unlike AT&T and Verizon, balked at helping the NSA track phone calling patterns that may have indicated terrorist organizational activities. Stern confirmed that Nacchio refused to turn over customer telephone records because he didn't think the NSA program had legal standing.

Finance Editor David Milstead can be reached at milstead@RockyMountainNews.com or 303-954-2648.