Joseph Nacchio's Days in Court

The former Qwest Communications chief is on trial in Denver for 42 counts of insider trading. What are his chances?

by Christopher Palmeri

Smiling and locking arms with his wife and one of his sons, Joseph Nacchio strode into the federal courthouse in Denver last week looking more like a man on his way to family wedding than a former chief executive charged with 42 counts of insider trading. Of course, Nacchio, the onetime head of telecom giant Qwest Communications International (Q), has never been accused of lacking confidence.

The 57-year-old New Jersey resident's fate is still to be determined. On Mar. 27, jurors heard a second day of testimony from the government's star witness, Qwest's former chief financial officer Robin Szeliga, who testified that Nacchio had refused to temper the company's earnings guidance despite his having heard from other executives that Qwest would not meet internal targets. Federal prosecutors claim that Nacchio sold more than $100 million worth of stock during the first five months of 2001, all the while knowing that Qwest's sales prospects were weakening. "This is a case about cheating," Assistant U.S. Attorney James Hearty said in his opening statement on Mar. 20.

Nacchio has steadfastly maintained his innocence. His attorney, Herbert Stern, told jurors during his opening statement on Mar. 20 that Nacchio only sold shares from grants that had vested and on which he would owe income taxes. Stern said Nacchio sold the shares as part of a regularly scheduled divestiture program and that the executive was considering leaving the company to care for a son who had tried to commit suicide.

Tough Case for the Government

As for Qwest's ultimate sales and earnings disappointments, Stern told jurors they weren't Nacchio's fault and that he had become a scapegoat for the industry's woes. "Bad things happened to the economy," Stern said. "Bad things happened to companies. Sometimes there is a feeling that somebody has to pay."

Outside legal observers say the government may have a tough time proving its case. Denver criminal defense attorney Jeralyn Merritt, who attended the first day of Szeliga's testimony, said she didn't think that the former CFO's testimony was entirely credible. When asked by Stern whether she had sought to testify against Nacchio to avoid prison, Szeliga said she had not. "She would have been better off admitting that," Merritt says. Szeliga pleaded guilty to one count of insider trading in 2005, paid a $250,000 fine, and was put under six months of house arrest. Merritt also said the government had not convincingly shown that Nacchio knew the company's earnings targets were too optimistic. "So far, they've proved he was very aggressive, and employees told him they were worried," Merritt says. "Testimony has also been that he told them to work harder."

Nacchio is among the last of the high-profile CEOs to stand trial in the wave of scandals that swept Corporate America in the first half of the decade. A verdict, guilty or not, will largely close the chapter on the telecom industry meltdown that saw big players such as Worldcom and Global Crossing (GLBC) declare bankruptcy, and others such as Qwest and rival Level 3 Communications (LVLT) almost join them (see BusinessWeek.com, 12/21/05, "The Case Against Qwest's Nacchio").

Turnaround in the Works

Nacchio was a top executive at AT&T (T) when Qwest founder, Denver billionaire Philip Anschutz, hired him to run the company in December, 1996. At that time, Qwest was a provider of long-distance telephone and data services over a communications network it had planted along railroad rights of way. Nacchio later orchestrated the 2000 mega-merger with Baby Bell U.S. West Communications that put the company in the local phone business.