April 20, 2007
Ex-Qwest CEO Convicted of Insider Trading
Posted by Lisa Fairfax

Just in time for the end of my insider trading lecture, Joseph Nacchio, former CEO of Qwest Communications, was convicted of 19 counts of insider trading yesterday relating to his sale of $52 million worth of Qwest stock. The sales occurred before Qwest disclosed that it would not meet its financial projections and before the public became aware of the accounting scandal at Qwest that led to the company’s restatement of some $2.2 billion of revenue. The prosecution claimed that Nacchio sold his stock while he knew that his company was facing financial difficulties and was not likely to meet its financial goals. According to the prosecution, Nacchio sold his shares when he knew that the company had only managed to meet its financial targets by heavily relying on one-time sales revenue that by their very nature could not be relied on to meet future targets. Moreover, the prosecution maintained that Nacchio sold his shares while seeking to convince the public that Qwest was doing well. To this end, the jury was shown public statements by Nacchio where he gave upbeat forecasts regarding Qwest, even when other company executives disagreed with those forecasts. The defense tried to paint Nacchio as merely overly optimistic, and argued that he sold his stock for reasons unrelated to the company’s apparent financial difficulties.

Nacchio's conviction can be viewed in a lot of different ways. Some articles have noted that when the verdict was read, there were cheers from former Qwest employees who had lost, in many cases, their life savings. Just as with the Enron verdict, there are some who will see this verdict as a form of justice and a signal that top executives, regardless of their motives, cannot spare themselves loss while other shareholders suffer. Others have suggested that the verdict improperly holds executives liable for being overly optimistic and disagreeing with other company officials. Certainly one can view the verdict as a signal that executives need to temper their optimism when addressing the public. Yet while both of these perspectives may have some legitimacy, the verdict may simply reflect the jury’s disbelief in the defense’s version of events. As with most insider trading actions, Nacchio’s suit came down to circumstantial evidence regarding why Nacchio traded and what he knew. From this perspective, the jury was not necessarily trying to send a signal about the problems with being overly optimistic or about holding executives responsible for their company’s failings. Instead, the verdict reflects the jury’s view that given the timing of Nacchio’s trades and the money he managed to save, his explanations were simply less than credible.

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