Day 5: Overview

The day was dominated mostly by the performance of Colleen Conry who, on behalf of the government, conducted the direct examination of Robin Szeliga, the former CFO of Qwest.  Conry has a relaxed and friendly demeanor and, most importantly, knows when to fold in tangles with Judge Nottingham.

Conry, among other things, used Szeliga to introduce statements made by Nacchio at employee meetings. At one he told employees that: “It’s grow, die or sell.” At another, he stated that: “The most important thing we do is meet our numbers.”

Szeliga also testified about complaints made by heads of business units over the 2001 targets imposed by Nacchio. Business units received a "top down" target and were then asked to prepare a "bottoms up" budget to meet the target.  Some had difficulty with the assignment.  At least one unit head, Szeliga testified, ultimately agreed to provide a budget that “close[d] the gap by increasing product sales” but was “adamant” that “he didn’t know how to get to his target yet.”

During the afternoon, the testimony often became dense, particularly when delving into the components of the first quarter earnings and their comparison to the budgeted numbers. The government used charts, which helped, but only modestly. The fundamental point was that recurring revenue was not increasing in an amount necessary to meet the targets and that, in order to stay on budget, there had to be an increase in non-recurring revenue, specifically IRUs. This was despite the fact that, according to Szeliga, these types of transactions were expected to dry up or decline significantly in 2001.

Szeliga acknowledged her own legal problems, which included pleading guilty to one count of insider trading for selling 10,000 shares (ostensibly to have the funds to remodel her home), paying a fine of $250,000 and restitution of $125,000, and remaining under house arrest (with an ankle bracelet) for six months. She also indicated that the Securities and Exchange Commission had, within the last few days, approved a settlement of the civil suit against her that required the payment of $577,000 (and some change) in fines and restitution and the imposition of a lifetime bar from serving as an officer or director of a public company.  

The cross began at around 3:30, with Judge Nottingham quipping: “Mr. Stern you only have to get through an hour and a half this afternoon,” a reference to Stern’s last effort at cross where he twice asked for a break.  As it turned out, ninety minutes was still too long.  

Stern scored a quick point. In her earlier testimony, Szeliga had discussed the budget approved by the board of directors in February. Stern got her to admit that the board had approved an earlier budget on December 1 with higher targets and that the complaints from the unit heads concerned this earlier budget.  It weakened otherwise compelling testimony about doubts within the business units over meeting their assigned targets.

Much of the remainder of the cross was less effective, spent on attempts to explore arrangements between Szeliga and the government to testify in the case. Szeliga denied that there had been any promises to testify and that her only commitment was to cooperate and answer honestly.  When Stern sought information about conversations with her attorney, Vincent Marella, who happened to be in the courtroom, objections began to fly.  After additional skirmishing and a lengthy side bar, Stern asked a series of cumbersome questions designed to avoid the privilege that began with “did you tell your lawyer to tell the government that” to which Szeliga inevitably replied “I don’t recall telling my attorney to tell the government that”.

At Stern's request, Judge Nottingham brought the day to a close a few minutes before five, relatively early for a Judge who on one of the days last week kept court in session until 5:40 pm. 

The cross of Robin Szeliga continues tomorrow.  

Comments

[Clint (an Engineer intrigued by the process)]

Am I missing something?
I don't yet understand the importance of Stern's point that Szeliga was using the more ambitious December budget. It might have taken the edge off of her testimony a little, but there was still the disparity between pessimistic internal projections and the optimistic street guidance. That disparity wasn't corrected until September. The indictment shows that the stock trades were occuring beginning in January and that nearly half of the trades had already occurred before the February budget correction. So half of the herd was already out of the stable before the Board felt a draft, and the door wasn't closed until the rest of the herd had escaped.

Another point that the Prosecution passed on was the "11 days in March". I might have missed something on the numbers, but it seemed like Ms. Sveliga was saying that the IRU's were falling short of even the 2000 comparables (by several $100mm) with only 11 days left in the quarter, when the IRU's were supposed to exceed those comparables until the 3rd/4th quarters by about $400mm.

In other words, she was saying that they only had 11 days (to the end of the quarter) to match the sales of 2000. That would be a difficult deficit to make up, let alone attaining the growth projections of EITHER budget to close the gaps and mitigate the risks that were known to be critical in the first quarter. If my understanding of the conditions in late March is correct the Prosecution could have scored some bonus points by highlighting the importance of that 11 days and that the business lines might not even maintain let alone grow.

C.