March 20, 2007 9:45 AM

Day 2: Opening Statements

Government calls first witness
4:15 p.m. Lee Wolfe, former Qwest investor relations director, has been called as the prosecution's first witness.

Wolfe said he talked to Nacchio two to three times a day, or as many as five to six times a day if some event was affecting Qwest's stock price. He said there were concerns in those days about the telecommunications glut and the lowering of financial targets by other telecommunications companies. That was putting downward pressure on Qwest's stock price, Wolfe said.

Analysts in late 2000 and 2001 were asking about how Qwest was able to make its targets while other telecommunications were lowering their forecasts, and Wolfe said he talked to Nacchio about that.

Wolfe was asked about the "Golden Rule." Wolfe said he dubbed that term from a standard that he believed Nacchio communicated: Never do anything to make the stock price go down. He was asked how often he felt that standard was applied. "Virtually every day."

"He wanted to resign"
4 p.m. Joe Nacchio wanted to step down from Qwest in January 2001, his attorney Herbert Stern said. At the time, one of his sons was emotionally ill and was shuttled among hospitals in New Jersey, Pennsylvania and Florida after an attempted suicide.
"(Joe) wanted to resign, he wanted out," Stern maintained. "He could have resigned from the company. No one could have stopped him from cashing in his vested options."
Directors convinced him to stay.

Joe Shows Emotions
3:30 p.m. Joe Nacchio lowered his head and wiped tears away earlier when his attorney Herbert Stern said Nacchio didn't want to take the Qwest job in 1997 because he had an emotionally "sick child" at home.
Nacchio eyes were red and he asked one of the defense attorneys for a tissue. He took off his glasses and wiped his face several times. In the first row, his son Michael took his glasses off and clearly was emotional. Nacchio's wife, Anne Esker, put her head down and was blowing her nose.
Stern said Nacchio agreed to take the job only after founder Phil Anschutz said Nacchio could keep an office in New Jersey and commute to Denver four days a week.

National Security Defense?
3:20 p.m.Lead defense attorney Herbert Stern indicates Joe Nacchio had additional information about Qwest's business that others didn't have. Stern's comments come in the context of the dissatisfaction he says Qwest executives have with the internal budgets being higher than the publicly-stated targets.
Just before, Stern said former chief operating officer Afshin Mohebbi's use of "huge stretch," in a December 2000 memo is a "term of art" reflecting what kind of stretch Nacchio wanted based on the internal budgets. Mohebbi was unhappy because he received bonuses based on making the internal budget numbers.

Joe Told to Sell?
2:50: Stern is outlining how Nacchio got paid only about $1 million a year in salary and bonuses, but was paid in "growth shares" and stock options in exchange for adding value to the company. He's making the case Nacchio was exercising options before they would expire and be worthless, and that he was being "pounded on" by his brokers to diversify his stock holdings. He said Nacchio went to the board to ask if his options could be extended, and the directors "weren't willing to do it."
And they said: "Joe, go sell."
The main courtroom has been almost full, and the overflow room about three-quarters full, but some people are beginning to drift out.

"Indictment is Wrong"
2 p.m.: Joe Nacchio's defense attorney Herbert Stern has started his opening statement, saying the "indictment is wrong."
Nacchio, he said, believed "passionately" and "honestly" in Qwest's publicly-disclosed financial targets.
Stern said the targets were "honestly" and "reasonably made," and "not made up." He said the debate internally wasn't about the publicly-stated targets but about an internal budget that was set $600 million higher to motivate employees to exceed public targets.
He said the public had no right to know about such internal budgets.
Stern said the Mohebbi memo in December 2000 that the targets were a "huge stretch," was left on Nacchio's chair. The Mohebbi memo, Stern said, wasn't about the public targets but the internal budget numbers used to get employees to exceed those targets.
Stern said he is confident Mohebbi will confirm this when he takes the stand.
"This isn't just about winning and losing, it's about doing the right thing."
Stern goes into the background of Qwest, and founder Phil Anschutz' vision to turn the company into one of "incredible size." Anschutz, he said, wanted Nacchio, then the number two person at AT&T, to turn this vision into reality. Nacchio didn't want the job, because he had an emotionally sick child.
The only way he could get Nacchio was to guarantee him he had to come to Denver only four days a week, Stern said, and could maintain an office in New Jersey.

Government's $1B Bombshell
12:55 p.m. Former CFO Robin Szeliga warned Joe Nacchio in budget meetings in late 2000 that his 2001 revenue targets were $1 billion too high, prosecutor James Hearty said.
Hearty also referred to two memos that former chief operating officer Afshin Mohebbi sent to Nacchio in December 2000, warning Qwest's financial targets were a "huge stretch."
Hearty's opening statement also is setting the stage for Lee Wolfe, Qwest's former investor relations director, to be a key prosecution witness. Wolfe may testify that Nacchio frequently held conference calls to tout the company's growth to investors, and that Wolfe himself tried to get Nacchio to lower the financial targets.
As Hearty explained, Qwest's stock would get "whacked" if it missed its targets.
Hearty also gave an example of how much influence Nacchio could have on Qwest stock. In mid-December 2000, Qwest stock declined by more than $5 as competitors began to lower forecasts. On Dec. 21, Nacchio reaffirmed the company's targets, and the next day the stock went up $5.
Nacchio has been taking notes during much of the government's opening statement. Hearty has looked relaxed during his opening statement, even eliciting laughter from some of the jurors when he acknowledged he was hazy about the definition of a particular term Qwest used.

Government Says Case Matter of Fairness
12:15 p.m.Former Qwest CEO Joe Nacchio sold $100 million of stock when he knew about problems at Qwest that the public didn't know about, the government's prosecutor said in opening statements this afternoon.
"And he sold stock faster than he ever sold it before," said prosecutor James Hearty.
Hearty said the government's case at its core is simple, and based on a simple principle: fairness.
He described Nacchio as a "persuasive promoter," who told investors that everything was great at Qwest, when in reality he was being warned the Denver telco would have to grow like it never had grown before.
"We will prove that the playing field was not level," Hearty said. "This is a straightforward case. It isn't a case about accounting. It's a case about fairness."
Hearty figuratively took the jurors to the 52nd floor of Qwest's downtown tower, and said that in late 2000, early 2001 Nacchio was told Qwest would have big problems if it couldn't grow its ongoing business, but investors weren't at that meeting.
Hearty explained Qwest was relying heavily on lower-quality, one-time deals, and that many of those deals were structured as long-term contracts with Qwest booking revenue upfront.
"The problem with growing your company through one-timers is that you have to start over each quarter," Hearty said. And make more each quarter. The business was further complicated by the fact that prices were being driven down, Hearty said.
Inside Qwest, Hearty said, Nacchio valued "recurring" business over the one-time deals, and Qwest even tracked the two figures separately. "However, outside Qwest Nacchio didn't tell investors how much revenue came from one-time deals."

Jury Seated
9:57 a.m.
An 18-person jury (with six alternates) has been selected and the jurors are now taking their oaths.
Judge Nottingham is now instructing the jurors to perform their duty conscientiously, and is stressing the evidence may reflect different versions of the truth. He is instructing jurors to hear both sides before they make up their mind, and to evaluate carefully the credibility of the witnesses.
Nottingham, known for keeping a tight rein in his courtroom, says he may have to "admonish" attorneys in the case from time to time, but jurors shouldn't draw any inferences from the scoldings.
He also says the defendant -- former Qwest CEO Joe Nacchio -- may exercise his right not to testify, and that jurors shouldn't draw any conclusions from that.

Jury selection nearing a close
9:45 a.m. Jury selection is continuing, and expected to wrap up later this morning in what is the second day of the insider-trading trial of former Qwest CEO Joe Nacchio.
The disclosure of potential witness lists made for one of the most intriguing events of Day 1, with Qwest founder Phil Anschutz listed as a potential defense witness, and his colleague Craig Slater listed as a possible prosecution witness. Former chief legal counsel Drake Tempest was listed on both the prosecution and defense may-call lists.
Tempest is in the position of knowing a lot about what was going on at Qwest in 2001 and about subsequent internal investigations. He also had a close relationship with Nacchio. The two commuted from the East Coast to the Denver telco's headquarters.

Posted by Nacchio trial wire at 9:45 AM | Comments (7)