Insider Trading Trial of Qwest Ex-CEO Begins

The trial of the former Qwest Communications (NYSE: Q) CEO Joseph Nacchio began Monday. Nacchio is accused of violating insider trading laws as he sold some US$101 million of the telecom company's shares. This is a case that could help close the book on the wave of major corporate scandals that hit the United States five years ago.

Nacchio, who served as Qwest CEO from 1997 to 2002, faces 42 charges of insider trading, each one involving between $191,000 and $13 million worth of stock.

The stock sales were in turn said to be driven by fraudulent accounting and overly optimistic outlooks that Nacchio oversaw at the regional telecommunications provider.

A Long Road

The Qwest scandal dates from the same era as the Enron and WorldCom debacles. While the criminal proceedings in those cases have largely been disposed of, the Nacchio case slowly wended its way toward trial.

Part of the delay was caused by Nacchio's repeated unsuccessful motions to move the trial out of Qwest's home city of Denver.

If convicted on all counts, Nacchio, 57, could face up to 10 years in prison. Prosecutors are also requesting that if convicted, the former executive be forced to surrender the $100 million he made on the disputed stock sales.

The Defense

Nacchio has made it clear he will argue in his own defense that his estimation of Qwest's future outlook was based in part on possible contracts the carrier might win from the government. He is set to claim those contracts were not public knowledge because they involved homeland security and intelligence agency work.

The case may come down to whether the jury believes Nacchio on that claim and whether there is sufficient evidence to suggest such contracts were in the offing presented during the trial.

Jury selection began on Monday for a trial that could last up to eight weeks. U.S. District Court Judge Edward Nottingham has sealed the witness list for the trial, but former Qwest employees who served under Nacchio are among those expected to testify.

Civil Action

Even after the criminal proceedings are disposed of, Nacchio and other executives still face civil actions brought by both shareholders and employees of Qwest, who saw their own investments in the company plunge in value amid the scandal.

The government claims that Nacchio sold $52 million worth of Qwest stock during April and May of 2001, when the stock was trading as high as $40 a share. Just over a year later, when Nacchio resigned his post, the stock sat at $2 per share.

Qwest has since restated results for 2000 and 2001, taking out some $2.2 billion in revenue. It has also settled a suit from the Securities and Exchange Commission.

Government Claims

The government claims that Qwest posted revenue from one-time sales of capacity of its fiber-optic network as recurring revenue starting in 1999. The accounting technique helped delay the onset of the impacts of the telecom market collapse that followed the dot-com shakeout, making it appear Qwest was healthier than it was.

During that time, Qwest also used its stock to buy former Baby Bell U.S. West, helping to spread the impact of the accounting fraud to employees and retirees at that company, the government claims.

The case may prove difficult for prosecutors, given that earlier attempts to win convictions of lower-level financial officers at the company have fallen short, even with the testimony of former CFO Robin Szeliga, who pleaded guilty to insider trading charges in 2001.

Others' Past Convictions

Insider trading convictions are relatively rare, as well. The most recent high-profile case involved Martha Stewart Living Omnimedia Chairwoman Martha Stewart, who was convicted in March of 2004 of selling stock in a biotech company based on information from an executive.

Former Enron CEO Jeffrey Skilling was convicted by a jury on 19 of the 28 counts he faced -- most of those he was acquitted on involved insider-trading claims.

More recently, some shareholders of Hewlett-Packard (NYSE: HPQ) have also sued executives at that company, claiming that stock sales made by CEO Mark Hurd were undertaken with the knowledge that the boardroom spying scandal would soon be exposed.

A Competitive Landscape

As the telecom market has improved, Qwest stock has rebounded from its historic lows. On Monday, as the trial got underway, was trading at $8.79, up more than 2 percent on the session.

Still, as a regional carrier that serves customers primarily in the West and Midwest, Qwest is widely considered the major telecom company most likely to suffer as the new competitive landscape takes hold.

Qwest made an aggressive attempt to buy long-distance provider MCI in 2005, dramatically outbidding rival Verizon for the right to buy the struggling company. In the end, MCI management and shareholders backed Verizon's takeover offer, even though it had a smaller price tag, citing the relative fiscal strength of that company over Qwest, which had a more debt-laden balance sheet.

A Bumpy Road Ahead

Qwest is using smaller mergers and other strategic moves to make up for its failure to land MCI, telecom analyst Jeff Kagan told the E-Commerce Times. The company remains a formidable regional carrier, but faces the prospect of competing directly against both national cable TV and telecom giants for high-value customers in the future, he noted.

"There is no doubt the period in questions at Qwest had after-effects that impact the way the business is today," Kagan stated, citing the concern that MCI cited in not wanting to partner with Qwest.

"It has managed to get back on its feet, but the road ahead is not an easy one," he concluded.