Nacchio : Defense Opening, Part II

March 20 2007, 1:09 PM

Live blogging of Defense opening argument. Note: This is not a transcript. This is my notes as fast as I can type. Spelling errors will be fixed later. Part I, Prosecution opening is here. Scroll down for updates or refresh every 15 minutes or so] 1:55 pm Code: publicly stated financial targets = PSFT Herbert Stern. I am going to do everything I can do to show you the indictment is incorrect. Makes a distinction between publicly stated financial targets and growth targets. There was no non public material information about the publicly stated financial targets of Qwest. Nacchio believed passionately in the publicly stated financial targets of Qwest. This indictment is wrong. I'm going to show it to you even though the prosecutor did not. On Sept, 7, 2000, a public guidance was issued stating what the financial targets were for the entire year of 2001. It is important for you to see what the guidance said. It is issued 16 months ahead of time. It is dependent on what an economy would be like 16 months into the future. To say that the investing public could count on this projection made 16 months into the future is simply wrong. These projections were not made up.

We will prove to you that the internal debate at Qwest was not about the publicly stated financial statement ... but about the budget which was $700 million higher than the publicly stated financial statement. It was purposely set higher, as an inspiration for the Qwest employees to work harder. People's bonuses depended not on meeting the psft but the internal budget. It is the psft that are charged in the indictment. Mohebbi said in his memo that the growth targets are a stretch. He didn't say the psft was a stretch. The memo from Mohebbi was not about Qwest's psft, but the internal budget, which was intentionally set $600 million higher as inspiration to the employees. I am going to show you these budgets and that they state they are higher than the psft. We who have no burden of proof will prove to you there was no acceleration. We will prove why the sales were done. This is a fraud case. Insider trading is a short hand way of saying stealing. It is an accusation that Nacchio took advantage of someone. I will show to you by what he did, didn't do and through documents that it is not true. Reads from the indictment. 2:10 p.m. Stern now moves to a chronology. Phil Anschutz owned U.S. West. Wanted to turn it into the biggest telecommunications company in the world. He went to Nacchio to get him to be part of it. Nacchio didn't want to be. Why? I'm going to tell you something that has never been told. Nacchio had a sick child. Not physically, but emotionally. He didn't want to take a job in Denver. Anschutz gave him a contract that provided for a New Jersey office, saying he would not have to come to Denver more than 4 days a week. Anschutz gave him lots of money. It was a private company. It was Anschutz' money. He cashed Nacchio out of ATT, giving him what he had vested there. Nacchio got three percent of the growth of Qwest. These were growth shares, or phantom stock. It was not the public's money. It was Anschutz' money. In 1997, Qwest went public. It was valued at $1 billion, 900 million, just short of $2 billion, by the investment banking community. Nacchio was entitled to $27 million, plus. 2:25 pm When the company went public, this was a debt the company owed Nacchio. The money didn't all vest at once. Under the plan, the growth share plan, in Feb. 98, he was entitled to $1 mill+, Feb 99, similar amount, Feb 2000, similar. Each year, 20% vested. Each year he could withdraw 20% of 20%. The last year was bigger. That money was to be paid in Qwest stock no matter what the shares were valued at. The value of the shares didn't matter. He got the same amount of money whether the stock was valued at 10 cents or ten times that He had no reason to pump up the price of the stock. It didn't affect what he got. Stern moves now to stock options. In order to keep Nacchio at the company, they gave him options. 6 million. They split. He ended up with 12 million options. But they would be worthless to him unless the stock went up. They were incentives to make the company better. And he did make the company better. He grew the company. Stern has a lot of charts he's using to explain Nacchio's acquisition of Qwest shares and options. People are walking out of the media room. He's losing them. The room is now half full. Part is because we can't hear as well when he's using charts. I'm going to go down to the main courtroom and see if it's the same there. The main courtroom is still full. So no one has left. [Update: I'm later told by some lawyers who watched the presentation it was not the same. Stern was easy to follow and clear they said.] Questions from reporter in the hall outside the media room: Is Stern's strategy to try and distract or confuse the jurors? From a lawyer in the elevator who had been in the media room: What's his theme? I'm back in the media room. Stern is explaining why Nacchio had to get rid of the stock options. "Use them or lose them." He gave 90, 000 shares to his kids and paid gift tax on them. Nobody keeps all their wealth in one stock. His advisors were pounding on him, "Diversify." He went to the Board of Directors and asked them to extend the time limit on his options. He didn't want to sell. They said no. 2:50 pm On Oct. 31, Nacchio held a press conference and publicly announced (reads from transcript) he had to sell his stock options. Mohebbi didn't give him a memo until December. He didn't even actually give it to him. He left it on his office chair. It's undated. Nacchio had to sell a million options a quarter. Explains tax consequences involved in selling options. He never sold his $28 million in stock. Only sold the options. Goes to Sept. 7. The PSFT. Background to it: On June 30, the merger was announced. [Stern moves between the charts. There are two easels up with charts and charts on the floor. The jurors all have their own personal tv monitors so the charts are more visible to them than they are to us. ] When the merger took place, Nacchio announced revenue projections for 2001. On July 9, it was reasonable based on what he had been told by investment banking houses. On July 19, he reiterated what they had told him. He also announced he expected Qwest's growth rate to be 15 to 17%. That's what the investment banking houses said. He didn't make it up. 3:05pm Stern says the company did better than the projections. "I don't blame you for being surprised," he tells the jury. They did 18 million. So Nacchio raised the projection. Stern asks, "What is this about the budget?" We were told by the prosecutor that the budget process had not begun. This is true. Puts up the budget of Nov. 15. The internal target, the budget target, is $21 plus billion, and it's bigger than the psft. And the gap and the growth and the target that the prosecution is talking to you about this morning are the complaints of those who were concerned with the budget increase of $700 million. Because their salary depended on it. The increase was imposed by Nacchio to get them to exceed expectations and increase company value to the shareholders. The Board of Directors met . Mohebbi had a 100% bonus if he could meet the internal targets set each year by his boss. He didn't like the increased number. Nacchio said he thinks Mohebbi can do it. It was a "stretch budget." It was a term of art within Qwest. Mohebbi's use of the term didn't mean meeting the psft was a stretch, it meant he disagreed with the stretch budget increase of $700 million. Nacchio had access to classified information that contracts would be given to Qwest that Mohebbi and others didn't know about. Throughout the relevant period of time, the employees they will hear from did not have the information Nacchio had. They were motivated by their own pecuniary interests. They didn't want to have to meet the increased budget numbers. Recess. Stern says he has about another hour to go. I'm now in the main courtroom. We're in recess. The reporters here say Stern is doing an excellent job. Nacchio is walking around, very confident. He just greets a friend with a big hug and smile. The jury files in. This is my first chance to see them. Several new faces from yesterday. A complete list of the jurors is here. The older man whose in-laws worked for U.S. West for 20 and 30 years, retired, and then had to go back to work because they lost money when the stock tanked (and whose neighbor had been president of the U.S. West retirees association) is on the jury. This was very curious to the reporters. Why would Nacchio's team leave him on? Stern: Reads Mohebbi's memo to Nacchio. Says again, the memo was not about the psft of Qwest, but the $700 million addition in the budget. That's what he says Mohebbi meant by it was a stretch. Moves to Mohebbi's second memo. Like the other memo, it wasn't given to Nacchio it was left on his chair. Prosecutor alleged Nacchio had to pump up the stock. On Dec. 20 we will prove Nacchio was not in Denver. He was in Appalachia with the now Abbot of the St. Benedictine Order distributing food to the poor. We will bring in the records and the Catholic abbot. (Note, now we know what a Catholic Abbot is on their witness list.) In the memo, Mohebbi says, "even the budget is doable." Nacchio didn't want growth shares. He has to pay taxes on every share that he takes. Ordinary income. He doesn't want the $24 million his contract provided for him to get in shares. In 2000, he began year year with 4 million plus stock options. He didn't sell them because of because of Mohebbi's memo. He told the public he would be selling them six weeks before he got the Mohebbi memo and he told them why he was selling. 3:50 As to why Nacchio withdrew from his first timed program to sell stock. Nacchio didn't want to sell when the stock got under $38 so he withdrew from the program. When the stock rose, he began to sell. He entered another selling program in May, to sell 10,000 shares a day. This time, to avoid the mistake he made last time, he set a floor of 38 for the sale of the options. (I think his point is that since he got the same amount of money no matter what the options sold at, his setting the floor was to preserve the stock's value for the shareholders.). We will prove to you and this will amaze you, he made the budget. The higher budget. He made it for the first and second quarters. They were performing at $600 million better annually than the psft. Nacchio had a way out. At the end of Jan. 2001, one of his sons attempted to commit suicide. He went into a hospital, then more hospitals. For more than 30 days the boy was confined in hospitals. Nacchio is looking down, his hand over his eyeglasses. He's crying. He just wiped his eyes. They are real tears. Nacchio came to Denver in Feb. He had an out . He could have resigned. He could have used his son's difficulties as a means to get out. He didn't. He committed to staying. They wanted him to sign a new contract. His contract expired at the end of '01. In October he signed a new contract with another 7 plus million options. They wanted him to stay. He will put the new contract in evidence. It had the same provisions about the New Jersey office. Bad things happen to companies. Sometimes there's a feeling somebody's got to pay. The investigation into Qwest starts and the drums start banging. 4 1/2 years after his last trade, they indict him. You will hear how many times they interviewed and re-interviewed people. After years of saying there was nothing wrong, they finally got Szeliga to say she was guilty of insider trading. Nacchio proclaims he did not do anything wrong. I will ask you not just for a verdict of not guilty based on reasonable doubt, but for a verdict of innocence.

Joseph Paul Nacchio proclaims that he did not. And when we have demonstrated every single thing that I tell you, I will appear before you, if His Honor will let me, and then I'm going to ask you not just for a verdict of not guilty, but for the verdict of innocent. Not just on reasonable doubt, because he didn't do it. He shouldn't be prosecuted.

End of defense opening. The Government says it's ready to call its first witness. I'm heading out now. I'll be correcting spelling errors later tonight. Update: I rode down in the elevator with U.S. Attorney Troy Eid at 4:10 pm. He introduced himself to me and said he knew me by name. He seemed very happy with the way the day had gone. He repeated twice, "It's a beautiful day." (It was a gorgeous day outside today, but I'm pretty sure that's not what he meant.) A reporter got in the elevator who had been leaving him messages about Sen. Salazar and the U.S. Attorney firing scandal. He told him he couldn't talk about it. He was very friendly but the most I could get out of him was that he gets up at 4:15 am every day to go to the gym.

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