Ex-Qwest CEO plans novel defense in trading probe

Joseph Nacchio, the former Qwest Communications International Inc. chief executive under scrutiny in an insider-trading probe of the sale of shares of the company as it was allegedly fudging its books to boost revenue, is mounting an unusual defense: He believed Qwest was doing well because it was getting lucrative secret national-security-related work from the federal government, people familiar with the matter say.

Nacchio, 56, has been a focus of a three-year federal investigation into the scandal that forced Qwest, a Wall Street stock darling during the late 1990s, to restate $2.5 billion in revenue and $2.2 billion in earnings for 2000 and for 2001, the year the accounting problems began coming to light.

A decision on whether to indict Nacchio, who left Qwest in 2002, is expected by the end of the year, people familiar with the matter say. Any charges against him likely would be narrower than the sweeping fraud indictments against other high-profile former CEOs, including Bernard Ebbers of WorldCom Inc. (now MCI Inc.) and John Rigas of Adelphia Communications Corp.

Prosecutors aren't likely to accuse Nacchio of falsifying the Denver phone company's books, these people say. Instead, Colorado's acting U.S. attorney, William Leone, is focusing on whether Nacchio sold Qwest stock in 2001 based on insider knowledge that the company wasn't doing as well as he and other executives claimed publicly, these people say.

People familiar with the matter say Nacchio's defense team is trying to head off any indictment by arguing that he was in a unique position to believe the company was performing as claimed because he knew that Qwest had landed some federal national-security contracts and was poised to get more. At the time, Nacchio was serving on two federal advisory panels that dealt with such issues -- the Network Reliability and Interoperability Council and the National Security Telecommunications Advisory Committee -- so he would know generally about the government's needs.

If charged, Nacchio would counter any assertion that he knew the company was faltering in part by arguing that other executives who had expressed worries about revenue shortfalls internally didn't know about those projects, the people say. Nacchio long has insisted through representatives that he did nothing wrong and that he made every effort to be forthcoming.

Nacchio recently retained Herbert Stern, a former federal judge, as his lead defense lawyer. Stern, also a former prosecutor, played prominent roles in the investigations of the Iran Contra affair and the murder of Malcolm X. He couldn't be reached for comment.

Qwest last year agreed to pay $250 million to settle civil accounting-fraud charges by the Securities and Exchange Commission without admitting or denying wrongdoing. Prosecutors haven't charged any top executives with doctoring financial statements. Former Chief Financial Officer Robin Szeliga agreed earlier this year to plead guilty to one insider-trading charge and to cooperate with the government's investigation.

At a jury trial in 2004, prosecutors failed to convict on any of 44 charges brought against four former midlevel Qwest executives charged with scheming to improperly book sales. Two executives were acquitted, and the other two later pleaded guilty to reduced charges and agreed to cooperate with prosecutors.

The continuing investigation is unlikely to result in criminal charges against other former Qwest executives, people familiar with the situation say.

In a civil lawsuit accusing Nacchio and other former Qwest executives of financial fraud, the SEC said Nacchio made $176 million in profit selling Qwest stock from 1999 through 2001. The U.S. District Court in Denver has delayed action on that suit until the end of the year so it wouldn't interfere with the criminal investigation. That delay possibly could be extended.

Questions about Nacchio's motivation to sell stock would be important to any insider-trading case. At the time, he openly defended selling Qwest stock after critics said such sales by a chief executive were unseemly. He said the sales, which occurred at regular intervals, were part of a prearranged trading schedule aimed at keeping his overall portfolio diversified and at raising funds to pay taxes on the exercise of stock options that were about to expire.

All that could make it harder for prosecutors to argue that Nacchio traded opportunistically or secretively. Investigators have been looking to see whether any of the trades didn't conform to Nacchio's prearranged trading program, people familiar with the situation say.

The statute of limitations on insider trading is five years, which means deadlines are nearing for trades in early 2001. Szeliga's illegal trade occurred in the spring of 2001, and people familiar with the matter say that period remains a focus of the Nacchio inquiry. During that time, Nacchio exercised options on millions of dollars of stock and sold shares with a market value of roughly $50 million, according to SEC data compiled by Thomson Financial. Such sales are legal as long as they conform to certain restrictions and don't violate insider-trading laws.

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