Day 2: of the Nacchio Trial: Opening and Closing

The second half of the day was long, beginning at noon and continuing with a few short breaks through the openings of both sides and the beginning of direct on the first witness.

James Hearty, an assistant US Attorney and graduate of the University of Colorado Law School, opened for the government. His approach was workmanlike if not dull, many of his visuals excessively simple (power point slides with three lines on them and so on). In many ways, it is fairly clear that the government will use the approach that worked against Ken Lay:  Hanging the defendant on his own words. The opening emphasized repeatedly that Nacchio spoke with investors and gave assurances about the public guidance while aware of negative internal information, particularly the inability of Qwest to meet its targets in recurring revenue (as opposed to non-recurring, which Hearty labeled “one timers”). Toward the end, Hearty played a tape of Nacchio on a conference call, stating: “Before I begin let me be perfectly clear we are again affirming our target for 2001 . . ”

Hearty dropped one very interesting item.  He indicated that Nacchio signed a statement representing that he had no material inside information sometime before the first trades alleged to be illegal in the indictment. The statement was dated in November but, according to the government, actually signed in December.  Without quite saying so, the government more or less implied that Nacchio deliberately backdated the statement to a time when he did not have the inside information at issue in the case.  In fact, Hearty characterized the practice as “backdating,” a pejorative term not lost on anyone in the courtroom, including the jury.

No surprise, Stern gave the opening of Nacchio's case. We quickly learned that the correct pronunciation of the defendant’s last name is not Nacchio but "Nashio."

Stern's tone was easier to listen to, mostly relaxed but occasionally indignant, walking away from the podium more than Hearty (although as a result, he sometimes spoke with his back to the jury).

Stern has at least two significant problems, both of which he addressed. The first is the internal documents indicating that Nacchio knew the public guidance was not accurate, particularly warnings given to him by then Qwest president, Afsin Mohebbi. Among other things, Stern promised to show that the Mohebbi warnings were not about the public guidance but about higher internal projections, termed within Qwest as "stretch budgets."  They were designed to encourage employees to do even better than the public guidance. 

Second was his attack on the credibility of the warning and the person who gave it. What the government called a memo, Stern labeled a “note” that was left on Nacchio’s chair. Moreover, he contended that Mohebbi had his compensation tied to meeting the internal budgets and was protesting (in the note on the chair) because of the potential affect on his compensation.  

The other issue was the motive for Nacchio selling. Stern spent a large part of the opening talking about the many options and growth shares received by Nacchio, including stock splits, vesting schedules, and tax payments, with plenty of charts full of numbers to illustrate the point (the print was too small and they were hard for anyone to read who wasn't near a computer screen).  It was not a simple process and bogged down his entire opening. It also emphasized the substantial amount of money received by Nacchio (3% of the increase in the value of Qwest).

Stern dropped a few interesting matters on his own. He noted that one piece of non-public information (a Mohebbi memo dated December 20) couldn’t have been received by Nacchio because he was in a Monastery working with an Abbott and distributing food to the poor.  The Abbott will, according to Stern, testify.

The other was that Nacchio could have “gotten out” when his son tried to commit suicide in late January 2001 (something Stern found difficult to discuss) and spent much of the next 30 days in hospitals. While the facts were sympathetic, it is hard to see how they allowed Nacchio “to get out.” Even if he chose that moment to leave the company, the prohibitions on insider trading, including information he learned while CEO, would still apply. Moreover, to some degree, the disclosure may have had the opposite effect. Despite the illness of his son, Nacchio didn't leave but returned to work and remained as CEO, flying in from New Jersey four days a week.

Stern sometimes acts homey and unsophisticated, a little Columbo like, indicating that he didn’t really understand what companies like Qwest did or referring to the buttons on the bottom of a computer (used to highlight exhibits) as something cartoon like.  But make no mistake about it, as his background would predict, he knows his case and knows exactly what he is doing. If only he can stop irritating Judge Nottingham, who towards the end of the second day peered from the bench and admonished: “you’ve got to stop making faces at me Mr. Stern.”

The first witness took the stand after 4:00 pm, Lee Wolfe, the head of Investor Relations under Nacchio. More on this tomorrow.