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Qwest civil trial's focus whittled down

Judge urges SEC to shelve charges to keep U.S. secrets

By Jeff Smith, Rocky Mountain News (Contact)

Published February 5, 2008 at 12:05 a.m.

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Joe Nacchio maintains he knew of future contracts.

Joe Nacchio maintains he knew of future contracts.

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A federal magistrate Monday encouraged the Securities and Exchange Commission to consider eliminating civil-fraud allegations against five former Qwest executives that could implicate national secrets.

Magistrate Judge Craig Shaffer indicated such classified information likely won't be allowed in a civil-fraud trial, and now is the time for the SEC to come to grips with the issue. "You have to decide the battleground you want to fight," Shaffer told an SEC official.

While the defendants hope the case eventually will be thrown out, Shaffer's ruling may merely mean the SEC will be compelled to narrow allegations to individual transactions with private companies, such as alleged secret side deals and backdated contracts.

Shaffer issued a temporary order prohibiting any exchange of evidence related to intelligence issues, in part to give the SEC time to reconsider how to try its 3-year-old case. He asked for a status report in 30 days. A trial date hasn't been set.

The SEC alleges former Qwest CEO Joe Nacchio, former Chief Operating Officer Afshin Mohebbi, former Chief Financial Officer Robert Woodruff and two former accountants engaged in a $3 billion financial fraud between 1999-2002.

The issue of classified information came up because Nacchio maintains he personally knew the Denver telco was poised to land lucrative classified telecommunications contracts.

The Justice Department recently stepped in, citing a statute in asserting that classified documents can't be released in a civil proceeding because they would cause damage to foreign relations and national security.

Polly Atkinson, trial counsel for the SEC in Denver, didn't argue with those points Monday, but did maintain the bulk of the SEC case against the former Qwest executives doesn't implicate state secrets.

"Our case is primarily a historical case," Atkinson said. "It's not what you expected (to get in terms of contracts), but what did you get?"

Nacchio attorney Jeffrey Speiser disagreed, saying an "overwhelming bulk if not all" of the SEC case involves state secrets because it goes to Nacchio's state of mind at the time. Other defendants in the case are latching onto the national security defense.

Similar issues about classified information came up during Nacchio's criminal trial, in which he was convicted of 19 counts of insider trading and is now free pending appeal. In the criminal trial, federal Judge Edward Nottingham ruled much of the classified information was irrelevant.

Shaffer suggested the SEC might have to rethink some of the allegations involving Qwest's fiber-optic capacity swaps, which allegedly were used to boost revenue. The SEC claims two-thirds of the international capacity Qwest bought wasn't needed.

Nacchio maintains there was a business purpose - Qwest needed to have the capacity on hand for potential U.S. government contracts.