Qwest Memos Warned of Weakness

The prosecution rested in the Joseph Nacchio insider trading trial earlier this week, but not before calling Qwest Communications International Inc. (NYSE: Q) former president Afshin Mohebbi and a couple of analysts to the stand. The jury also heard further testimony implicating Nacchio in the possible backdating of an "irrevocable instruction" document that would allow him to sell shares.

Mohebbi's memos
Mohebbi joined the chorus of former Qwest executives who say they warned Nacchio that the company would not be able to meet aggressive revenue targets that he set for them. Unlike other witnesses called to testify, however, Mohebbi's warnings came in memos sent directly to Nacchio.

Saying that Nacchio "wasn't an email kind of person," Mohebbi communicated his concerns through a series of memos that he typed out and left on Nacchio's chair, according to the Denver Post.

Through those memos, Mohebbi says he warned that Qwest's financial targets were "a huge stretch" and that the company could be in trouble if its recurring revenue didn't increase.

"If we don't crank up recurring growth by April, we got big problems," Mohebbi wrote in a December 2000 memo.

According to the Rocky Mountain News, Mohebbi recounted a heated exchange that he had with Nacchio after urging the CEO to improve financial disclosure to investors. Mohebbi testified that Nacchio approached him after receiving the memo and asked why the president was getting involved in investor relations, telling Mohebbi "it's not your job."

Not all went smoothly for Mohebbi, however. On cross examination, defense attorney Herbert Stern introduced emails aimed at countering the former president's testimony that he was uncomfortable with the company's revenue projections.

According to the Washington Post, in an email referring to a slide presentation to be given in May 2001, Mohebbi wrote, "I like this. The buildout for the growth page is very good." The presentation in question projected Qwest to achieve 15 to 17 percent growth.

Mohebbi has been granted immunity from criminal prosecution.

Nacchio avoided analysts
Adding to the government's case were two analysts who covered Qwest while Nacchio served as chief executive, both testifying that the company hid the effect of one-time Indefeasible Rights of Use (IRUs) on company financials.

According to the Denver Business Journal, Davenport & Co. LLC telecom analyst Drake Johnstone testified that Qwest did not disclose $500 million in one-time IRU transactions or that those transactions made up about 38 percent of the company's growth during the first quarter of 2001, at the same time Nacchio was selling shares of company stock.

Separately, analyst Prashant Khemka of Goldman Sachs & Co. Asset Management said that he wrote to Nacchio personally in July 2001 because he was having difficulty getting satisfactory answers on Qwest financials from the company's investor relations staff.

As reported in the Denver Business Journal, Khemka informed Nacchio that Qwest "performance and reporting is under closer scrutiny than before" and that the company’s lack of transparency would hurt it.

Backdating questions persist
Finally, the prosecution called an attorney who was hired to draft an "irrevocable instruction" document government lawyers say was illegally backdated. Gregory Patti testified that he created the document on Dec. 8, 2000, at the behest of Qwest.

The Denver Post reports prosecutors showed two copies of the document -- one version that was drafted for Nacchio to sign and sent to Qwest on Dec. 10, and one that was signed by Nacchio and dated Nov. 3.

The irrevocable instruction document states that Nacchio did not have material, nonpublic information at the time it was signed, and would have allowed him to sell shares of company stock during a no-trade window. At issue is the fact that Nacchio had several meetings with company officials during November and December 2000 where witnesses say he was repeatedly warned of weakness in company financials.

Prosecutors are trying to prove that Nacchio sold $101 million of Qwest stock while aware that the company was at risk. Nacchio is charged with 42 counts of insider trading, each of which carries a possible sentence of 10 years and a $1 million fine.

— Ryan Lawler, Reporter, Light Reading

Bones 12/5/2012 | 3:10:43 PM
re: Qwest Memos Warned of Weakness It is unfortunate that some of the deals manufactured exclusively to meet quarterly targets were not part of the trial:

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