Nacchio Qwoted Qwestionable Qwest Targets

The trial of Joseph Nacchio, former CEO of Qwest Communications International Inc. (NYSE: Q), provides a fascinating look into the inner workings of the carrier during his stewardship, a time when witnesses say Nacchio repeatedly ignored warnings that the company could not meet revenue and earnings targets he presented to analysts and the public.

Nacchio was CEO of Qwest from 1997 to 2002 but left after months of speculation due to a Securities and Exchange Commission (SEC) inquiry into the company's accounting practices. (See Nacchio Leaves Qwest and Notebaert Takes Out Nacchio.)

Not long after, it was revealed that Nacchio oversaw a period of questionable capacity swaps at Qwest, and the SEC and Department of Justice filed suits against the company for falsely reporting and artificially inflating revenues.

In the wake of these investigations, Qwest nearly filed for bankruptcy amid a series of earnings restatements. The company restated earnings for 2000 through 2002, leading to a $2.5 billion reduction in revenues and earnings during that period. (See Did Qwest Qwash Morgan's Analysts?, Prosecutors' Party at Qwest, and Qwest's Future Qwestionable.)

Robin Szeliga, Qwest's former CFO, took the stand earlier this week to testify against Nacchio as part of a plea agreement she reached with federal prosecutors in 2005. According to news agency reports on Szeliga's testimony, Qwest department heads were uncomfortable with the company's projected budget for 2001, saying all three believed there were gaps between revenues they believed the company could earn -- and the targets Nacchio helped set for them.

Szeliga also described a late-night telephone conversation in 2001 that she had with Nacchio before he was scheduled to have a conference call with Wall Street analysts. In that conversation, Szeliga claims she urged Nacchio not to provide analysts with what she believed were inflated revenue goals for the company. Despite her efforts, Nacchio held a conference call the next morning confirming Qwest's revenue targets.

Szeliga pleaded guilty to one charge of insider trading and was sentenced to two years probation, six months of home detention, and a $250,000 fine in June 2005. As part of her plea agreement, she promised to testify against Nacchio when his case went to trial.

Greg Casey, former head of Qwest's wholesale markets division, also took the stand this week. In his testimony, Casey recounted an outraged email he sent in response to aggressive revenue targets that were set for his group.

After telling executives that his group could produce $4.56 billion in revenue in 2001 "if everything went right," his department's revenue target was set to $4.8 billion, reports the Rocky Mountain News on Wednesday. In December 2000, Casey received an email that raised this target even further, to $5.02 billion, and asked him to provide a plan to meet this target within 24 hours.

"Bull----," was Casey's one-word response, in an email copied to Nacchio and other executives, according a trial report from the Denver Post.

Nacchio is charged with 42 counts of insider trading, each of which carries a possible sentence of 10 years and a $1 million fine. The trial, which has been underway in the U.S. District Court in Denver, centers around his sale of $100.1 million worth of stock in 2001. Prosecutors claim Nacchio profited by selling stock while privy to nonpublic financial information that showed the company was at risk. (See Prosecutors Pounce on Nacchio .)

Legal representatives for Nacchio did not return calls for comment.

— Ryan Lawler, Reporter, Light Reading