Day 4: The Defense Begins to Show its Strategy

 Today's afternoon session began with a slow and uneventful cross-examination of Craig Slater, followed by a very brief redirect.  For the most part the Defense again appeared less than prepared for their cross-examinations.  Stern spent the first hour of his cross, asking Slater the same exact questions that had already been asked by prosecution, following up each answer with an internal summary.  This approach did not sit well with Judge Nottingham and eventually ended up in an exchange between the two where Judge Nottingham stated "these internal summaries are not proper in this court.  If you've established something than move on.  You can do that in your closing.  Just go to the next point, rather than your internal summary."  A defiant Stern returned at Nottingham with a half hearted apology followed by the comment: "you don't have to be disrespectful."

As the day went on, the Defense's strategy came through with a bit more clarity, especially during the cross-examination of Craig Slater.  Lead Defense Counsel, Herbert Stern, asked Slater and other key witnesses about Nacchio's growth plan option.  In particular, Stern was interested in the fact that the growth stock was valued at a fixed denomination at the time Qwest went public, and the fact that Nacchio asked Qwest for the cash value of the shares instead of the stock options.  What Defense is trying to show here is that even though Nacchio was compensated in the form of stock options, the options were in reality much more like cash because the value of the shares were fixed to a specific dollar amount.  The fact remains, however, that the compensation was not cash and therefore subject to the same rules and regulations that apply to transfer of any other stock.

Another strategy taken by Defense was to show that Nacchio had no choice but to sell his options when he did.  Stern questioned Slater about Nacchio's request to extend the life of the options and whether such an option was even possible.  Slater stated that the Qwest board of directors made every effort to extend the expiration date on Nacchio's stock options, but it was simply not an option as Qwest would have incurred considerable tax liabilities in doing so.  Stern then goes on to question Slater about the expiration dates and not in so many words implies that Nacchio had no choice but to exercise his options when he did otherwise the options would expire.  Furthermore, the Defense asked Slater if Nacchio could have resigned from Qwest at any point and exercised his options, to which Slater replied "yes."  On first glance this would seem like a futile strategy by the Defense, as Prosecution reminded everyone in the court room that there was in fact one restriction that prevented Nacchio from exercising his options, the fact that options may not be exercised upon knowledge of material non-public information.  In reality Nacchio's option would have been to do what he was required to do and disclose the material information before exercising his options.  While this was a great move by Prosecution, and perhaps the best option they had at the time, we cannot discredit Stern's approach just yet.  The Defense wanted to show that Nacchio had an alternative motive for the sale of his options (they were going to expire), and they may very well have done just that.

The second half of the afternoon went by much faster as prosecution and defense flew through a list of witnesses.  Sally Anderson took the witness stand to show what Nacchio communicated to employees in an email and how that email impacted one particular employee’s retirement investment decision regarding Qwest stock ownership. She testified that she had worked for USWEST for 26 years. As a regional training manager, she participated in the USWEST stock purchase plan and after the merger in Qwest’s stock purchase plan, which characterized as similar to a 401(k) plan, whereby she could allocate on a pretax basis 16% of her salary, with an employer match up to 6% of her salary. When she received the Nacchio email on September 7th, 2000 to Qwest employees, she was currently allocating 50% of her allocation to Qwest and the other 50% to the USWEST fund. Based upon what she said was “important” information, Ms. Anderson changed her allocation to 100% for the purchase of Qwest shares. In particular, she read in court the portion of the email she had highlighted upon reading the email in 2000: “First, I want everyone to know we are raising our revenue and EBITDA targets for 2000 and 2001.” Based upon this and other information in the email from Nacchio, she was persuaded to change her stock allocation.  All in all it was another exciting day in Judge Nottingham's courtroom, and at this point I think it's safe to say the hearings are officially on their way. 

Trial is set to resume on Monday at 8:45 AM.