The Nacchio Appeal (His Options Were Going to Expire, So He Had to Sell)

On October 9, 2007, former Qwest CEO, Joseph P. Nacchio, filed a 57 page opening brief with the U.S. Court of Appeals for the Tenth Circuit.  Among other things, the brief contends that the evidence presented by the prosecution was insufficient – arguing that Mr. Nacchio did not trade based on inside information; that the omissions at issue were not material; and that Mr. Nacchio did not know the information was material.  Appellant’s Opening Brief, United States v. Joseph P. Nacchio, No. 07-1311 (10th Cir. filed Oct. 9, 2007).

With regard to the first contention (did not trade based on insider information), Mr. Nacchio asserts that he had no choice but to exercise his options and sell the stock because the 7.4 million $5.50 options were set to expire in June 2003.  Mr. Nacchio explains that he asked the board to extend the term on his options (claiming he did not want to exercise them), but the board was unable to assist him for accounting reasons.  As a result Mr. Nacchio announced in October of 2000 (nearly six months before the trades at issue), that he would begin exercising and selling those holding in danger of expiration at a rate of one million options per quarter.  Id. at *12.  

The defense insists that all of Mr. Nacchio’s trades “were consistent with his stated intentions.”  They point to the fact that Qwest company policy only allowed trades during short “trading widows” following the announcement of each quarterly earnings.  Accordingly, Nacchio exercised and sold options during the fourth-quarter of 2000 and first-quarter of 2001.  Id. at *11-12.

Furthermore, on February 15, 2001, Mr. Nacchio entered into a 10b5-1 plan, and instructed his broker to exercise 11,500 options each day and sell the corresponding shares.  The defense points out that Rule 10b5-1 provides a safe harbor for trades made outside the otherwise limited trading window, according to a predetermined 10b5-1 plan (assuming, of course, that the insider enters into the plan without any knowledge of material inside information).  Id. at *12.

In addition, defense points to the fact that “when Qwest’s stock fell below $38 on March 1, Nacchio canceled the 10b5-1 plan and announced that he would not sell at that price.”  When stocks rebounded, Mr. Nacchio resumed sales – trading 1.2 million shares during the trading window in April 2001.  “At the close of the second-quarter trading window in May, Nacchio entered into a second 10b5-1 plan to exercise 10,000 options per day as long as the stock price was at least $38.”  Id.  However, the defense places emphasis on the fact that when Qwest stock prices fell below the predetermined floor, Mr. Nacchio ceased all sales and held on to 9 million vested options and more than 500,000 shares – ending the year with “more vested options than he had at the beginning.”  Id. at *13. 

The defense ends its argument here by challenging prosecution’s theory that Mr. Nacchio’s original motivation to spread out his sales was based on his “desire to unload Qwest stock in advance of the collapse.”  Id. at * 13.  The defense argues that the fact that Mr. Nacchio sold more shares in 2001 “proves nothing” – maintaining that “Nacchio’s October announcement explained why upcoming sales would depart from prior trading.”  Furthermore, they argue that Nacchio was forced to cancel his February plan because stock prices fell below $38; not because he wanted to “dump stock faster.”  As a result, defense asserts, Mr. Nacchio was restricted to selling his shares within the trading window in April, and that is exactly what he did.  Id. at *14.

This concludes our review of the defense argument regarding the insufficiency of evidence.  We will continue our discussion of Mr. Nacchio’s appeal later this week with a close look at the arguments regarding the jury instructions and the exclusion of defense’s expert testimony.  

The primary materials for this case may be found on the DU Corporate Governance website.