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Nacchio verdict: uphold or overturn?

10th Circuit panel will decide which argument merits favor in appeal

By Sara Burnett, Rocky Mountain News (Contact)

Published December 14, 2007 at 8:13 p.m.

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Will Joe Nacchio go free?

On Tuesday, attorneys for the former Qwest CEO will stand before three judges at the 10th Circuit Court of Appeals in Denver and argue that he should.

Maureen Mahoney, Nacchio's high-powered appellate lawyer from Washington, D.C., says he was wrongly convicted of 19 counts of insider trading in April, then improperly sentenced to six years in prison and ordered to forfeit $52 million.

The court should acquit him, Mahoney says, or at the very least give him a new trial or reduce his sentence.

Legal observers say Nacchio's chances of seeing one of those things happen improved this week, when the 10th Circuit announced that the same three judges who decided Nacchio could stay free pending his appeal would hear the case.

"With this panel, I'd bet on reversal and a new trial," said University of Denver law professor Jay Brown, who attended most of Nacchio's nearly monthlong trial.

Brown said the judges - Paul J. Kelly, Jerome A. Holmes and Michael W. McConnell - have drawn some conclusions about the case that could favor Nacchio.

But others say it's anyone's guess.

DU law professor John Holcomb said the government's reply to Nacchio's appeal was very persuasive and effectively rebutted the issues Nacchio's attorney raised in the appeal.

And history shows that the presiding judge, U.S. District Judge Edward Nottingham, is rarely overturned.

An analysis by Holcomb found that Nottingham was reversed 14 times out of 108 appeals during his 17-year career on the federal bench. All 12 of his sentencing decisions appealed to the 10th Circuit were upheld.

There is no deadline for the appellate court to issue its decision, though it has said the case will be heard and decided on an expedited basis.

Nelson Phelps, executive director of the Association of U S West Retirees, is hopeful the verdict and sentence will stick. Phelps' organization represents many workers who lost money when Qwest's stock price plummeted.

He said that if Nacchio does get off the hook, "That's not justice in our book."

A look at the issues and arguments in the appeal

Issue

The government didn't prove that Nacchio traded on material, inside information and that he knew it was wrong.

Defense argument

Nacchio sold stock in early 2001 because he had valuable options that were going to expire. He was bullish about the stock, and any warnings he was getting from his executives about not meeting revenue projections referred to internal targets, not the numbers he was giving investors. No one - from Qwest general counsel to outside auditors - told him it would be wrong to sell.

Prosecution argument

Nacchio had "wave after wave of bad news" from executives, predicting a revenue shortfall greater than the difference between the internal and external numbers, so he knew the earnings projections given to investors couldn't be met. He knew the information was material because analysts repeatedly asked for it. The defense never presented evidence that Qwest lawyers or auditors thought it was OK for him to sell.

Issue

U.S. District Judge Edward Nottingham improperly instructed the jury on what information is considered material and on how to decide that Nacchio did not act in good faith.

Defense argument

Nottingham should have told jurors that forward-looking statements can't be considered misleading if accompanied by a warning about possible risk, such as the cautionary note at the bottom of all Qwest releases about revenue projections. The judge wrongly told jurors they could find Nacchio did not act in good faith if he committed any other dishonest act, allowing the jury to convict him based on actions other than insider trading, such as alleged backdating of a document.

Prosecution argument

The instructions were correct. An instruction referring to the cautionary note on Qwest statements would have improperly focused the jury on the company's public projections, not on the inside information that Nacchio had when he sold stock. The judge didn't say any dishonest act would indicate Nacchio didn't act in good faith. Other courts have approved instructions on good faith that are "virtually identical" to the ones Nottingham gave the jury.

Issue

Defense expert Daniel Fischel, a law professor who has testified in several high-profile corporate cases, was wrongly excluded from testifying on Nacchio's behalf.

Defense argument

Fischel's testimony was vital to Nacchio's defense. He would have presented an analysis of Qwest disclosures and shown that the information Nacchio had, when disclosed, did not have a major impact on the stock "on a one-day basis," and therefore was not material. The judge let two government witnesses testify that the information was material, then refused to let Fischel rebut that testimony.

Prosecution argument

Fischel was excluded from testifying because Nacchio's lawyers didn't follow court rules. Lawyers waited until three days before trial to tell prosecutors and the court that Fischel would testify. They did not give the basis for his opinions, or any methodology, until weeks into the trial, when they turned over hundreds of pages of analysis to prosecutors. Nottingham called the untimeliness "egregious."

Issue

The judge should have let Nacchio present his classified, national security defense. Previous filings indicate Nottingham ruled the defense was irrelevant.

Defense argument

The CEO was optimistic about Qwest in early 2001 because he knew the company was in line to receive top-secret government contracts. Redacted court documents suggest Nacchio planned to argue that Qwest didn't get the contracts because he refused to participate in a phone spying program.

Prosecution argument

Nacchio's version of events was "a lie," said First Assistant U.S. Attorney Cliff Stricklin, lead prosecutor on the case, while speaking at a Denver luncheon in October. He said prosecutors were ready to discredit the defense if Nacchio presented it.

Issue

The sentence of six years in prison and forfeiture of $52 million was wrongly calculated and should be reduced.

Defense argument

Nottingham ruled that Nacchio's gain from the illegal stock sales was $28 million - the value minus costs and taxes. This method punished Nacchio for the legitimate gains the stock made from 1997 to 2001. The actual gain from the inside information was closer to $1.8 million, a defense expert said. Had the judge used that amount to calculate the sentence, Nacchio would have received a prison term of 41 to 51 months. Nacchio should have to forfeit, at a maximum, $44.6 million.

Prosecution argument

The sentence was correctly calculated. The methodology used by the defense expert to place Nacchio's gain at $1.8 million amounts to "hypothesizing and 'what-ifs' " because there is no way to know what would have happened to the stock price if Nacchio had disclosed everything he knew, all at once. The law states that people convicted of insider trading must forfeit all proceeds, including money paid in costs or commissions.

At a glance

* The conviction: Nacchio was found guilty on 19 counts of insider trading in connection with selling $52 million of Qwest stock in April and May 2001. He was sentenced to six years in prison, ordered to forfeit $52 million and fined $19 million. He is free pending appeal.

* What's coming up: Nacchio's appeal will be heard at 2 p.m. Tuesday at the Byron White U.S. Courthouse at 1823 Stout St., Courtroom 1. Each side will have 15 minutes to argue its case. Judges likely will ask questions. The panel will issue its ruling at an undetermined date.

burnetts@RockyMountainNews.com or 303-954-5343. Staff writer Jeff Smith contributed to this report.

Comments

  • December 16, 2007

    10:39 a.m.

    Suggest removal

    Brockage writes:

    Once a local business columnist started taking off after him in nearly every piece he wrote (no, not a writer for the Rocky), Nacchio's fate was sealed. Conviction by columinist.

  • December 16, 2007

    2:37 p.m.

    Suggest removal

    phoneman writes:

    You blame a columnist for this?? joe had it in his mind that he was going to thumb his nose at AT&T for by-passing him for their top job. at the same time the other phone companies were downgrading their earnings forecasts, joe was claiming that qwest was making more money than they knew what to do with. qwest has the smallest customer base of any of the bell companies. how was that possible? bottom line - it wasn't possible - unless you use creative accounting. joe convicted joe and i hope he spends time in prison thinking about the employees and shareholders that got screwed while he laughed all the way to the bank.

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