Qwest Founder: Nacchio Was Focused on Family Crisis

Qwest Communications International (NYSE: Q) founder and billionaire Phil Anschutz testified on behalf of former company CEO Joe Nacchio Thursday, telling jurors that around the time he was accused of selling stock, a distraught Nacchio was considering resigning because of issues within his family.

Nacchio told Anschutz on more than one occasion that he was considering resigning from the regional phone carrier in January 2001 because one of his sons had attempted suicide, Anschutz said.

"He was quite agitated, very emotional," Anschutz told a packed courtroom as Nacchio's defense on insider trading charges began on day 11 of the trial. "In fact, he broke down in tears. I was quite surprised of the news of his son and further surprised by the fact that he would want to resign from the company," he stated.

The billionaire, who amassed a fortune as a land speculator and railroad owner before forming Qwest -- which actually began as a network of fiber optics cables laid along Anschutz-owned railroad lines -- gave his testimony over the objections of prosecutors.

U.S. District Judge Edward Nottingham allowed the testimony after determining it would help jurors understand Nacchio's state of mind during part of the time when he is accused of selling some US$101 million worth of Qwest stock in 42 separate trades, all during the first few months of 2001.

Secret Deals?

Prosecutors contend that Nacchio knew Qwest's stock was heading for a sharp drop as the company ran headlong into the post dot-com collapse of the telecommunications industry.

Nacchio -- whose attorneys still won't say for certain whether he will testify on his own behalf -- is expected to argue that he believed potential contracts with secretive government agencies would come through and enable Qwest to meet ambitious growth targets.

That stance may have changed and the defense may now be focusing on the state of mind of Nacchio. Defense attorney John Richilano on Thursday told the judge that Anschultz' testimony would help jurors understand Nacchio's emotional state at the time.

Anschutz, who typically steers well clear of the public spotlight, testified that he did not discuss Nacchio's compensation or how long he would remain at Qwest during those conversations early in 2001. "We talked about his son," he said.

How It May Continue

The trial is likely to wind down early next week. Judge Nottingham asked the defense team to inform prosecutors over the weekend whether Nacchio himself will testify in the closely watched trial. Each of the 42 insider trading counts against Nacchio carries a penalty of up to 10 years in prison and a $1 million fine.

Anschutz was the second witness to testify Thursday about Nacchio's state of mind around the same time; a Roman Catholic abbot who advised Nacchio during the period said Nacchio also expressed to him a desire to quit the company.

The defense hopes to demonstrate that Nacchio was more focused on his family's well-being than on capitalizing on stock sales .

Prosecutors concluded their portion of the case Wednesday after 20 witnesses testified over the course of 10 days, many of whom testified about Qwest's practice of relying on one-time revenue sales to meet Wall Street revenue projections.

Financial analysts who said Qwest may have relied too heavily on one-time sales of fiber optics networks were among those who testified.

The government alleges that Nacchio knew the company's sales targets were too optimistic, but continued to stand by them publicly even while dumping his own stock.

A Hard Sell

Qwest has already acknowledged that it improperly booked revenue, restating results in 2003 to remove some $2.5 billion in revenue it had recorded in 2000 and 2001, primarily from one-time sales of capacity on its high-speed network and swaps with overseas carriers, in which Qwest recorded as revenue the capacity it traded to other carriers.

However, Judge Nottingham will not allow testimony about the restatement because it doesn't directly address Nacchio's stock sales.

Insider trading is notoriously difficult to prove. In fact, one of the most high profile cases of insider trading in recent memory ended with Martha Stewart Living Omnimedia Chairwoman Martha Stewart convicted on obstruction of justice charges rather than the insider trading she was alleged to have covered up.

Still, regulators and law enforcement are not likely to stop trying to prosecute insider trading, Kent Womack, a professor at the Tuck School of Business at Dartmouth College, told the E-Commerce Times.

"The markets only work if there is at least a perception of a level playing field," he noted.

Most executives now use planned programs to divest themselves of stock at predetermined times to avoid even the appearance of trading on inside information. In addition, while relatively few cases end in convictions, simply being accused of insider trading may carry a strong enough stigma in the business community that even rare enforcement has a strong deterrent effect.