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Financial

Nacchio Advisor Stirs Up the Defense

The trial of former Qwest CEO Joe Nacchio took a scandalous turn last week, as Nacchio's former financial advisor, David Weinstein, took the stand.

Weinstein testified that in December 2000, Nacchio was worth $547 million, including more than $200 million worth of Qwest stock options that hadn't been vested or exercised.

According to the Rocky Mountain News, Weinstein said Nacchio was consistently upbeat about Qwest, and he expected his company's stock to rise. Weinstein claimed that he encouraged Nacchio to diversify his wealth by selling more of his stock options, but Nacchio wanted to wait until the stock rose higher.

Weinstein also testified that Nacchio was preparing to sign an "irrevocable election" document in December 2000 that would allow him to sell shares during a "no-trade" window for insiders in early January 2001.

According to the government's case, the document was created on December 13, and backdated to Nov. 3. Prosecutors are trying to convince the jury that Nacchio had meetings with department heads between those dates during which he received information about the company's financial condition.

Weinstein's testimony was shrouded in controversy, as motions were filed before and after he took the stand. Prior to Weinstein's testimony, prosecutors sought to introduce evidence of an asset transfer in February 2002 through which Nacchio allegedly sought to hide $90 million in his wife's name.

U.S. District Judge Edward Nottingham refused to allow Weinstein to testify about the asset transfer, saying that there was no "temporal proximity" between the transfer in 2002 and the $101 million sale of stock options in 2001 that is under consideration as part of Nacchio's insider trading charges.

But following Weinstein's testimony, Nacchio's attorneys filed mistrial motions, claiming that testimony about Nacchio's net worth was "irrelevant and prejudicial," and that the court had erred in allowing prosecutors to ask Weinstein if Nacchio had asked him to assist in an act of dishonesty involving Qwest in 2000.

An IRU-turn
Also in the Nacchio trial last week, government prosecutors continued to call former Qwest executives to the stand. This time it was Grant Graham, former finance vice president for Qwest's global business unit, testifying that Nacchio set tough revenue targets for his business unit. (See Nacchio Qwoted Qwestionable Qwest Targets.)

According to news reports, Graham said his unit earned about $4.5 billion in 2000 and its forecast for 2001 was $7.3 billion. The Denver Post quotes Graham as saying, "It was a huge stretch. In order to get the revenue target we were going to have to sell a lot more volume."

Graham pleaded guilty to one count of wire fraud in a separate fraud case involving Qwest. As part of the deal, he agreed to help the government's investigation into Qwest.

Mark Schumacher, former controller and CFO of the National Mass Markets business unit of Qwest, took the stand after Graham. According to the Rocky Mountain News, Schumacher testified that he wanted to disclose the effect that one-time Indefeasible Rights of Use (IRUs) had on company financials, even going so far as to approach then-CFO Robin Szeliga.

Schumacher claims he urged Szeliga to disclose these IRUs in the company's first-quarter 2001 earnings report, but was told that disclosure of the one-time deals wasn't needed. He said the company's outside auditor, Mark Iwan of Arthur Andersen, also felt disclosure was unnecessary.

What was the big deal? In short, the IRUs were just one-time revenue bumps that, when not disclosed properly, allegedly gave the appearance that Qwest was growing much faster than it really was. That false picture of growth might have pumped up Qwest's stock at the time, the government alleges.

How big a difference did it make? Schumacher explained the IRU revenue disclosed in Qwest's second-quarter 2001 report was more than double what it had been during the year-ago quarter. He said Qwest's IRU revenues for the second quarter of 2001 was $430 million, compared with $197 million for the second quarter of 2000. For the first half of 2001, Qwest's IRU revenue was $857 million, compared with $416 million in the first half of 2000.

— Ryan Lawler, Reporter, Light Reading

materialgirl 12/5/2012 | 3:10:56 PM
re: Nacchio Advisor Stirs Up the Defense As an analyst, I was blown away by Nacchio and Q financial statements. I would double up laughing at his comments on CNBC, amazed that he was not carried off stage. The claims he was making about growth were just physically impossible. It was just as bad as Bernie Ebbers on CNBC, unable to look at the camera as he lied on and on.

The IRU impacts were also glaring, both at Q and GBLX, but no one seemed to understand. They were selling the silver, and folks thought this was recurring, high-margin business. As long as that lead Merrill analyst (what was his name, now barred from the industry) joked that life was okay, everyone followed like sheep. It is like the housing bubble, despite a growing mound of evidence to the contrary, no one wanted to burst the bubble that was creating a payday. Or perhaps our world is just getting too complex for enough folks to understand.
paolo.franzoi 12/5/2012 | 3:10:55 PM
re: Nacchio Advisor Stirs Up the Defense
mg,

Those were the days when acquisitions were evaluated on things like $M/engineer. I still hadn't figured out why it would not have been cheaper to hire the people if that was the value of the deal.

Metrics and rational thought during the bubble were so lost it was very funny.

seven
Upside_again 12/5/2012 | 3:10:54 PM
re: Nacchio Advisor Stirs Up the Defense Well known fact of all the vendors who gave Qwest
and executives millions of warrants in return for pre-IPO purchase orders? Did Nacchio not have his hand in those pots too? Avici, Cosine, etc. come to mind. When do the rest of the theives come to trial?
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