Federal Magistrate Judge Craig Shaffer has recommended to the Securities and Exchange Commission (SEC) that it drop the civil fraud charges against five former Qwest Communications International Inc. (NYSE: Q) executives including former CEO Joseph Nacchio.

The recommendation comes because the case involves government state secrets -- evidence that's not admissible in a civil court because it would jeopardize national security.

The SEC has agreed to Judge Shaffer's recommendations and now has 30 days to review the case. It could decide to dismiss the case altogether or narrow the charges to Qwest's transactions with private companies.

The information in question involves Qwest's alleged use of capacity swaps to fraudulently boost revenues. The SEC says two thirds of the capacity Qwest purchased in these swaps was not needed. But Nacchio has maintained he had knowledge of lucrative classified government contracts that Qwest was going to land which would have made the excess capacity necessary.

SEC attorney Polly Atkinson said during a federal court hearing yesterday that the majority of the charges against Nacchio and the other former executives were not based on prospective government contracts, but rather on historical data, making the national security defense a moot point.

Meanwhile, news reports yesterday quoted Nacchio's defense lawyers saying that "an overwhelming bulk, if not all" of the case involves these secret government contracts. During Nacchio's criminal trial for the same charges however, the secret government contracts were not brought up during his defense.

Qwest's executives have been charged with more than $3 billion of fraud between 1999 and 2002. Nacchio has already been convicted in criminal court of 19 counts of insider trading. He was sentenced to six years in prison and was slapped with a $19 million fine. (See Former Qwest Boss Gets Six for Insider Trading.) His case is in appeal.

— Raymond McConville, Reporter, Light Reading