Nacchio Indicted On 42 Counts Of Insider Trading

Former Qwest CEO Denies Any Wrongdoing

The U.S. Justice Department on Tuesday indicted the former head of Qwest Communications on 42 counts of insider trading, accusing him of illegally selling off more than $100 million in stock, and making a $42 million profit.

Joe Nacchio, 56, walked into FBI headquarters in Denver Tuesday morning to surrender. He appeared in court a few hours after the indictment was announced and pleaded not guilty before being led away in handcuffs. After posting a $2 million bond, the former CEO left the federal courthouse later on in the afternoon.

"I'm looking forward to getting this thing on with, and being able to tell my side of the story, finally," Nacchio said after he was released. "It's pretty tough for four years, when you have to sit back and let everybody take a shot at you and not be able to say anything because you don't know where people are coming from. So now we know. I will talk about the merits of it."

He said he is confident that he will be exonerated. The terms of his bail allows him to return to his home in the East Coast but a federal magistrate judge ordered that he surrender his passport.

The indictments accuse Nacchio of selling the stock after he privately learned the company might not meet its financial goals.

"According to the indictment, from January through May of 2001, Mr. Nacchio, while in possession of material, non-public information about the financial health of Qwest, accelerated the sales of Qwest stock and sold in excess of $100 million worth of Qwest common stock in violation of insider trading laws," said U.S. Attorney Bill Leone, during a noon news conference detailing the indictments.

The indictment states that "Nacchio knew this policy, was repeatedly reminded of it and was advised that selling... was a crime."

The indictment blames Nacchio for "a manipulative and deceptive" scheme to commit fraud and says he was "specifically and repeatedly warned" about the financial risks facing his company just five months before the stock trades in question.

Prosecutors refused to discuss who allegedly warned Nacchio about revenue problems at Qwest or who might testify at trial. But Leone said some 13 million pages of documents will be turned over the defense attorneys.

Each count of insider trading carries a penalty of 10 years in prison and up to a $1 million fine. The government is also seeking $100,812,582 in restitution.

The indictment is the first criminal charge against Nacchio in the government's nearly four-year-old probe into accounting practices at Qwest.

"I think it's important for corporate executives to recognize that when they're in possession of information that the general public is not in possession of, they're under a duty to abstain from trading, selling or buying stock," said Leone. "Failure to honor that rule impairs confidence in our markets."

Nacchio arrived at Denver International Airport Monday night after coming from a United flight. Nacchio now lives in New Jersey.

His attorneys, Herbert Stern and John Richilano, released this statement: "After many months of intense media attention and speculation, Joe Nacchio looks forward to vindicating his name in court. He has already repeatedly testified when requested by the government, for five days in SEC proceedings and two days before the U.S. Congress. He has never invoked his constitutional right to refuse to testify. He had no reason to do so. Now that he will have his day in court, he will plead not guilty with perfect confidence in his exoneration."

A grand jury has been meeting for months to investigate allegations against Nacchio that include insider trading.

The 42 counts come from 42 transactions that took place and that ranged from $191,000 to $13.6 million each.

Nacchio worked for the company between 1997 and 2002, during its multibillion dollar accounting scandal.

The charges come nearly three years after then-Attorney General John Ashcroft announced the first indictments in the Qwest investigation, calling it an example of the government's intolerance of white-collar crime.

With Nacchio's indictment, Leone said, that investigation is virtually complete.

A business ethics professor at the University of Denver said he believes Nacchio's case may set a precedent for future cases.

"I think that maybe Joe Nacchio might be viewed as a poster child for the strategy of pumping up the stock and then dumping them. And that's not going to be tolerated any more," said professor Kevin O'Brien.

The Securities and Exchange Commission is already pursuing a civil suit against Nacchio and other former Qwest executives over a plan to fraudulently boost company revenues by $3 billion.

The government has alleged in both civil and criminal cases that Qwest and some of its former executives participated in a massive financial fraud between April 1999 and March 2002 by falsely reporting sales or trades of capacity on its fiber-optic cables as recurring revenue.

The fraud allowed Qwest to improperly report approximately $3 billion in revenue that eased its 2000 acquisition of regional phone company U S West Inc., the government has said. Qwest later restated earnings from 2000 and 2001 to erase about $2.2 billion in revenue.

The indictment said Nacchio was aware of Qwest's "extremely aggressive" financial targets and that to meet those targets in 2001 the company would have to significantly boost its flagging "recurring revenue business."

It said he also knew there wouldn't be enough revenue from other sources to "close the gap" between Qwest's publicly stated goals and its actual performance.

Nacchio resigned in June 2002 and has always said he did nothing improper.

In 2002, Nacchio told Congress that he made stock sales believing the company's financial statements always represented "a full and accurate picture of its financial condition." He has already asked a judge to throw out the SEC complaint, saying the allegations are "not the stuff of securities fraud."

Qwest also faces a number of shareholder lawsuits.

At least six other former Qwest executives have been indicted in the last three years.

In 2003, Grant Graham, Thomas Hall, John Walker and Bryan Treadway were indicted in an alleged scheme to fake $33 million in revenue for Qwest. Graham and Hall pleaded guilty under plea bargains. Walker and Treadway were aquitted at trial.

This year, there was more trouble. In February, former Qwest executive Marc Weisberg was indicted on wire fraud and money laundering charges. He was accused of trying to personally profit from investment opportunities at the expense of Qwest and its shareholders.

And in July Qwest's former Chief Financial Officer Robin Szeliga pleaded guilty to one count of insider trading in federal court, admitting to improperly selling 10,000 Qwest shares in 2001.

What To Expect At Trial

Both Szeliga and former sales executive Gregory Casey are expected to testify against Nacchio.

During a criminal trial last summer for the four former Qwest midlevel managers, Szeliga said there was significant pressure from Nacchio to meet financial targets -- enough to create a "pressure-cooker" atmosphere.

In addition, former Qwest President Afshin Mohebbi has been granted immunity and is expected to testify should the case go to trial. Mohebbi's attorney, Paul Grand, has said Mohebbi will not face criminal charges but declined further comment.

A former AT&T executive, Nacchio was hired to head Qwest in 1997 when it was installing fiber-optic networks along railroad rights-of-way. He attracted Wall Street's attention after engineering Qwest's acquisition of U S West but resigned under pressure about eight months before Qwest restated revenue for 2000 and 2001.

Jacob Frenkel, a former federal prosecutor and former lawyer for the SEC, said the absence of charges accusing Nacchio of manipulating company earnings was striking.

"With the amount of time that has passed in this investigation, we must assume that the government has taken its best shot and this is it," he said. "The government has put its bullet in the chamber and it has fired. We're going to find out at trial if they hit or miss."

Last month, Qwest said it would pay $400 million to settle the claims of tens of thousands of shareholders who purchased Qwest securities. The deal does not cover Nacchio and former CFO Robert Woodruff. Qwest earlier agreed to pay $250 million to settle SEC charges of fraud without admitting wrongdoing.

Qwest was the nation's fourth largest long distance company when it merged with US West in 2000.

Federal prosecutors expect Nacchio's trial to last two weeks when it gets under way. The next hearing, a pretrial conference, is set for Jan. 20.

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