First Day Of Jury Selection Wraps Up In Nacchio Trial

Former Head Of Qwest Charged With Selling $100 Million In Stock

The insider-trading case opening Monday against the former head of one the nation's largest telecoms could hinge on the interpretation of secret government deals and what a CEO should be expected to know about his company.

Former Qwest Communications chief Joe Nacchio, looking fit and upbeat, watched prospective jurors with interest and actively consulted with attorneys as jury selection began Monday in his $101 million insider trading trial.

U.S. District Judge Edward Nottingham kept the mood in the courtroom light and laced with humor as the prospects were asked about news coverage of the case, whether they knew any of the potential witnesses, had contact with law enforcement agencies and other questions.

Eighteen people were assigned to the jury box with several dozen more prospects seated in the spectator section. Representatives of the news media and a handful of spectators filled the remaining seats.

Nottingham ended the session after 8 1/2 hours without finalizing a panel. In all, 11 people were excused after being questioned about their exposure to media coverage of the case, personal hardships or other issues.

For example, one potential juror was released after she told the judge she had attended accounting seminars where the Qwest accounting scandal had been discussed. Another was excused because of his responsibilities on a family farm. In addition, 14 prospects were dismissed through challenges by either prosecutors or defense attorneys with no reason provided.

Prosecutors claim Nacchio, a Brooklyn-born former AT&T executive, sold his stock while knowing the company was at financial risk. Shares of Qwest Communications International Inc. plummeted from more than $60 a share in 2000 to just $2 a share in 2002 and its near-collapse left thousands of pensioners in financial straits.

"The whole theory of insider trading is that somebody in Mr. Nacchio's position who has information in that position shouldn't be able to profit in a way that the average shareholder couldn't," said legal analyst Jim Miller.

Nacchio has an unusual defense: The sale wasn't improper, he maintains, because he believed Qwest stood at the time to get millions in secret contracts from clandestine government agencies. Within Qwest, he alone was privy to the contracts, he says.

The contracts are a key point of evidence. Both sides have agreed financial data from the contracts will be used at trial, though the agencies involved will remain secret.

Jury selection was to resume Wednesday morning. Nottingham wants to seat 12 jurors and six alternates for the trial, which is expected to last up to eight weeks.

"It's a long trial. You are asking for potential jurors to make quite a commitment in terms of time and travel," Miller said. "Also, we have a lot of Qwest shareholders in this state who would probably have some feelings toward Mr. Nacchio, (and) not necessarily very positive."

It could be a complex trial: Evidence includes some 13 million pages of material from classified documents; internal e-mails and memos; complicated financial tables; and statements from top Qwest executives during Nacchio's reign.

In the end, the case will come down to what Nacchio knew and his intentions when he sold the stock, legal analysts say.

The prosecution's witness list is extensive with more than two dozen names. Interestingly, Nacchio was not mentioned Monday as a witness in his own defense.

Nacchio "doesn't deny selling the Qwest stock nor can he deny that he avoided rather significant losses when the stock fell off the cliff," said Peter Henning, a Wayne State University law professor who has followed the Qwest case. "This is all intent."

Nacchio was charged in December 2005, nearly three years after then-Attorney General John Ashcroft announced the first indictments in the Qwest Communications International Inc. investigation, calling it an example of the government's intolerance of white-collar crime.

Although Qwest was forced to restate about $2.2 billion in revenue because of the scandal, Nacchio's case will focus narrowly on 42 stock sales he made in the first five months of 2001 amid internal warnings that the company was at financial risk. The transactions ranged from $191,000 to $13.6 million each.

Each count faced by the 57-year-old carries a penalty of up to 10 years in prison and a $1 million fine.

Federal regulators say Qwest falsely reported sales of capacity on fiber optic cables as recurring instead of one-time revenue between April 1999 and March 2002. That allowed Qwest to improperly report approximately $3 billion in revenue, which helped pave the way for its 2000 acquisition of former Baby Bell U S West Inc.

Seven former Qwest managers have faced criminal charges ranging from wire and securities fraud to insider trading. Two were acquitted; the others pleaded guilty to lesser charges and received probation. Nacchio is the last to face trial.

A Securities and Exchange Commission civil lawsuit accusing Nacchio and several former Qwest executives of orchestrating the fraud is pending. Qwest separately paid $250 million to settle other SEC fraud charges.

Prosecutors have said Nacchio was warned that Qwest needed to boost its flagging revenue to meet aggressive financial targets set for 2001.

Those targets called for the company to generate as much as $21.7 billion in revenue. The figures were reaffirmed in analyst calls, press releases and SEC filings until Sept. 10, 2001, when Qwest announced that it expected 2001 revenue to be much less, about $20.5 billion.

"In order to really villainize the defendant, the government prosecutors will seek to show that he was engaging in massive deception on a daily basis," said attorney Christopher Bebel of Houston, a former federal prosecutor and former SEC counsel.

The prosecution team is stacked with attorneys experienced in corporate crime: Assistant U.S. Attorney Cliff Stricklin who, together with Leo Wise, helped prosecute former Enron Corp. leaders; Colleen Conry, who worked on the HealthSouth Corp. case; and James Hearty, who has been on the Qwest investigation.

Nacchio was hired from AT&T in 1997 to head Qwest. He pushed to acquire U S West Inc., becoming a favorite on Wall Street for combining Qwest's fiber-optic network with U S West's phone services.

He eventually became a member of two panels that work with the federal government and the communications industry on homeland security and other issues. Because of those ties, Nacchio said he alone among Qwest executives was privy to information about secret government contracts.

Anyone wanting access to the classified information must get a Justice Department security clearance. For the trial, prosecutors and Nacchio's attorneys worked out substitute explanations that can be used publicly.

Nacchio's defense team, led by former federal judge Herbert Stern of New Jersey and Denver attorney John Richiliano, contend the potential contracts weren't included in the company's 2001 guidance.

The defense may call brokers who advised Nacchio to diversify his stock holdings by selling Qwest stock as early as July 2000 because he was overexposed in telecommunications stock.

Henning, a white-collar crime specialist at Wayne State University, said Nacchio is fighting "hindsight bias" because he was supposed to know what was happening at his company as chief executive officer.

"That's why this defense is so important. It takes what I think is otherwise an implausible defense of, 'I thought the company was doing well,' and gives it at least a measure of plausibility," Henning said.

Prosecutors maintain that revenue Qwest received from secret government contracts amounted to less than 1 percent of its total revenue. They also note that Qwest's classified government revenue declined in 2002.

U.S. District Judge Edward Nottingham has kept close control of the case, prohibiting attorneys from discussing details in public. He will seat a panel of 12 jurors and six alternates but no information has been released about the size of the prospective jury pool.

The case is an emotional one for thousands of former U S West Inc. retirees who lost thousands of dollars in pension money when the company ran into financial trouble, said Mimi Hull, president of The Association of U S West Retirees.

Hull, who retired from U S West in 1995, said she diversified her portfolio so she did not suffer tremendous losses but has heard from retirees who lost as much as $500,000. The organization represents about 20,000 retirees.

"I just think people are frustrated that more hasn't happened to bring about justice and this is going to be their only shot at it," said Hull. "The retirees are very, very interested in seeing a conviction."

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