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[Note: This is not a transcript. It is my notes of the testimony and proceedings, typed as fast I can. Spelling errors will be fixed later. I will update every 15 minutes or so — you can either bookmark and check back or refresh your screen periodically.] I’m in the courtroom, it’s 10:20 am. I’m sitting behind the Nacchio family today. Lee Wolfe is on the stand undergoing direct examination by prosecutor Wise. Objections are being made by defense attorney John Richilano, which means he will be doing the cross-examination. We’re taking the morning break for 25 minutes. But first the Judge has something to say outside the presence of the jury. The technical equipment in the courtroom has been malfunctioning. Tech staff thinks it may be because he is allowing blackberries and pdas in the courtroom, as well as laptops. New rule: Cell phones, PDAs, blackberries must be turned off. Laptops can stay on for now but he may order them turned off too if that doesn’t solve the problem. If he orders laptops turned off, I’ll move to the media room. The Government asked for a short hearing to complain about Stern’s opening yesterday in which he implied the Government did something wrong by not showing the indictment to the jury. The judge said he doesn’t want these hearings during the day because he would have to keep the jury waiting. He doesn’t intend to babysit the lawyers or encourage thumb-sucking. But he tells the Government to go ahead. They make their complaint. The judge responds in a raised voice, that’s exactly the kind of thumb-sucking he’s talking about. Stern did nothing wrong. He’s allowed to make reference to the charges in the Indictment in order to refute them. The prosecutor, Colleen Conrey accepts his decision. She tries to make her point that she’s not complaining about his making references to allegations in the Indictment but that Stern implied the Government had an obligation to show it to the jury when everyone knows Indictments don’t go to the jury. Nottingham repeats his ruling.
We’re now in recess until 10:45. Joe Nacchio just introduced himself to me and I met Herb Stern. I made sure to tell both of them while I’m a defense attorney, I’m here as media blogging the trial for 5280. 10:45 Q. What happened on April 24, 2001? A. The earnings announcement was made. After that we had an investor relations call. During it, the five year targets of 15 to 17% were confirmed. Wolfe says he spoke with a lot of analysts after the call. Nacchio was the lead Qwest representative at those meetings. The investors said it was now time to “take our numbers to believablility.” They pointed out the targets were set almost two years earlier. N. said Qwest was a better company both in terms of product line and management and better able to deal with the pressures of the economy. He didn’t mention the one timers related to data services and IP. Many times investors asked about the one time transactions. Wise shows him a memo he dictated over the phone in Jan. 2001 to his assistant and sent to the senior management team, including Nacchio and Mohebbi , in preparation for the January 24 investor conference call. Q: Whose decision was it to withhold the one-timer information from investors? A: Mr. Nacchio’s. Q. What was the number of times data and ip were emphasized? A. 20 to 30 times. Wise shows him a slide. It’s a press release about earnings for the second quarter of 2000. It said Internet and data continued to drive revenue in the second quarter for a record $1.28 billion and $256 million of EBITDA Nacchio approved the release. After the release was issued, Wolfe met with several analysts. When Nacchio talked to investors, he didn’t talk about the one time transactions. Q: What happened on Oct. 24, 2000. A. Another earnings release went out. By now, Qwest and U.S. West were merged. It was Nacchio’s decision to emphasize data and IP as source of revenue growth. Buckets: the products that comprise data and internet services (called IP). Nacchio talked about many products (buckets) Qwest had but he never mentioned the one-time transactions. Nacchio approved the press release. It said, “Total revenue was driven by internet and data services growth of more than 50%, which comprised more than 2/3 of the total revenue increase for the quarter.” 11:08 am Jan 24, 2001, another press release went out on earnings. It said, “the revenue growth was driven by strong demand for internet and data services, which increased by almost 40% in the quarter.” The investors wanted to know what comprised the internet and data services, but Nacchio, who approved the press release, did not tell them about the one-timers. Wolfe got a note from an analyst named Simon Flannery. He raised questions about “the black box” that was data and IP. Investors felt they didn’t have visibility as to what was really driving the data and IP growth. Wolfe mentioned it to Joe. Joe scolded Wolfe for allowing the analysts to lower their recommendations of Qwest. Wolfe says that when brokers and analysts analyze a company they are making of a recommendation about the company, e.g., they may decide it’s a strong buy. Orthey may recommend investors hold the stock but don’t buy any more — but there’s no need to go south. Or their recommendation could be to sell. So there had been a strong buy recommendation on Qwest which the analysts lowered to just a “buy.” On April 24, 2001, the earnings for the first quarter of 2001 earnings were issued. It said, “The total revenue increase was driven by Internet and data services growth of 44 percent as demand for Qwest services remains robust.” Nacchio approved the release. Wolfe went to a meeting of Capital Research. Additional information was provided to the analysts there about the relationship between the data and internet component of IP but it didn’t contain any information about one-timers. Wolfe: Over the course of the time period just looked at, analysts were becoming increasingly frustrated that their issues weren’t be addressed sufficiently by Qwest and Nacchio, and were becoming suspicious. They weren’t getting the “granularity” they wanted. Granularity means detail. The suspicion and concern was that something more was happening than they were being told with respect to Qwest being able to make the number. Q: Did you have stock options then? Yes. A stock option meant he had to stay at Qwest a certain length of time before they vested. The stock price is set when the option is granted. If the stock is worth more when you exercise the option, you get the increase, less commission and taxes. Or you can hold the stock but you own it at the time. Wolfe had 45,000 stock options at the beginning of 2001. He exercised and sold 20,000. He got $646,000. The last time he sold was April 30. He stopped selling because he knew deep down that he had material information that they were using one-timers and not telling, so he had a crisis of conscience. He knew he shouldn’t do it. “It was wrong even in January” — but he wasn’t aware then just how critical these one-timers were. When he stopped selling in April, he had 25,000 options left, about $825,000. He never sold them. He left Qwest in 2002, and ultimately, they expired. They are no longer any good. He was interviewed by the FBI in this case. 11:26 am He understood the statements he gave to the FBI couldn’t be used against him but if he lied, or if his statements led them to other matters for which he was liable, he’d be subject to prosecution. His understanding was that he could be prosecuted. He got a proffer letter of immunity before appearing before the grand jury. New topic. Another conference call, exhibit 593. It is the transcript of the earnings call related to the 4/24 announcement. He was present for the call. The purpose was to communicate the detail on the first quarter earnings. Investors and analysts listened on the call, Nacchio did the speaking after Wolfe introduced him. Exhibit 593a is the last page of the transcript. Moves to admit this portion, the wrap-up of the call and play it in its audio format. Richilano says the entire exhibit should be admitted and then they can play what they want. Judge agrees. All of 593 (entire transcript and tape) is admitted. Tape starts to play. We hear Nacchio say, “We see nothing to dissuade us from the plan we announced 18 months ago.” Q: Did you discuss with Nacchio before the call what his statements would be? Yes. Wolfe said to Nacchio that because the decision had been made not to lower the guidance, “don’t be too bullish and don’t make comments that overtly suggest there were no problems because there were certainly issues. ” He’s not sure whether Nacchio responded directly. Wolfe told Nacchio he should not make that statement because he was aware from looking at available information that there was a significant increase in use of one-time transactions while small business was slowing dramatically. Small business was down from 8% to 2.2 % growth. This was the result of economy and competition concerns plus one-time transaction concerns. It appeared to him that one-time transactions were not sustainable. “We couldn’t find enough of them in the future and we wouldn’t make our financial projections. We would be punished by investors selling stock. ” Investors had concerns about sustainability. When they buy stock, they expect company is going to continue to grow. If they anticipate earnings results would fall, they would sell the stock or not buy it. The investors’ information was coming from the press releases and conferences discussed at trial this morning. 11:44 am Wise wants to ask about a Wall St. Journal article. Defense objects saying it appeared after Nacchio sold his last stock. The jury really likes when one side objects. They all lean forward. Judge calls the parties to the bench so Government can make a proffer. Former Rocky Mountain News reporter Charlie Brennan, sitting next to me introduces himself. We realize we know each other. The benches in the courtroom are really hard. We’re all shifting positions in our seats. My battery is going, I hope the Judge breaks for lunch soon so I can recharge. I’ll clean up the spelling tonight. I’ll start a new thread for the afternoon. I’m looking forward to John Richilano’s cross examination of Wolfe. 11:55. Government can inquire about Wall St. Journal. On June 18, WSJ had a front page article which focused on fiberoptic capacity and pricing in the industry. There was a glut. It called into question the ability for revenue growth. What did he discuss with Mr. Nacchio about how the glut would affect Qwest’s business? The discussion was that the article suggested there would be decreased price and growth in the industry and since Qwest was highlighted in the article, it meant there would be decreased revenue. How were the issues in the article related to these one-time transactions? Wolfe: They weren’t directly related but they raised the entire concern about growth in that area which renewed the investors’ broad concern. Investors were not aware of this time of the magnitude of the one time transactions or their implication for growth. There was a reference in a SEC filing to the one-time transactions but no reference to the magnitude. Investors asked the question of him and Nacchio. Judge interjects there’s no dates being provided by the prosecutor for this information. “Lay a foundation and get careful about this.” Wise gives a date and Wolfe says investors were not told then about the magnitude of one-time transactions. Wolfe says Nacchio was angry about the WSJ article. He said they were comparing Qwest to start-ups . On June 19, Qwest issued a press release and held a conference call to address these issues. On the call they were told fiberoptic capacity was not a valid concern. Lunch Break. Court resumes at 1:30. I’ll be back with a new thread. Comments are welcome.
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