Day 6, the afternoon

Both legal teams scored major points in the afternoon providing a great deal of drama.

In his continuing cross examination of Robin Szeliga in the afternoon, Stern got Szeliga to admit that Mark Iwan, audit partner of Arthur Andersen, met regularly with the board of directors, in particular the audit committee in which Joe Nacchio was not a member for the purpose of providing some measure of independence over financial matters supposedly “out of the reach of undue influence by the CEO.” Szeliga testified that Iwan was supposed to “make sure that Qwest’s financial statements were properly reflected” and that he was there to advise the board to ensure the financial statements were consistent with GAAP (Generally Accepted Accounting Principals).   For the action brought by the Securities and Exchange Commission barring Iwan from practicing before the agency for five years, go here. 

Moreover, Szelia testified that Iwan informed the audit committee the following: (1) for the first quarter of 2001 and the past year, Andersen “had no problems of with the financial statements”; and (2) Anderson was not concerned with the lack of the disclosure of the nonrecurring nature of the IRUs because the sales of IRUs “were not significant in either fiscal 2000 or 1999.”

Coleen Conry on redirect asked Szeliga if Iwan did not take exception to the financial statements, why did she plead guilty to insider trading. After an objection by Stern was sustained, this line of questioning was dropped, but it was clear that the government was trying to make a preemptive strike against a possible Nacchio defense strategy that he and Qwest relied on the professional CPA for the proper treatment of the IRUs. Thus, he could rely on Andersen to show that the failure to make IRU disclosures was not material to support a conviction of insider trading.

Conry also tried to attack the 21 consecutive quarters that Stern emphasized in which Qwest made the “numbers.” She asked Szelia: “weren’t they restated.” After another Stern objection and a lengthy sidebar, the judge sustained the objection. This ruling effectively prevents the government from showing how the subsequent restatement of the financial statements was required due to the fraudulent treatment of the accounting for the IRUs according to the SEC civil complaint for fraudulent misrepresentation. However, the government appears to have chosen not to try to show that Nacchio knew of the potential fraud aspects related to the financial statements that led to the restatements. Thus, it is ironic that Stern will likely continue to emphasize the great success Qwest had in “making the numbers” for 21 consecutive quarters.

Szeliga was followed by Greg Casey.  With a crisp direct examination by the government along with a witness with a law degree providing straightforward answers, the balance of the afternoon was very easy for the jury to follow.

As the head of the wholesale division responsible for the sale of the IRUs, Greg Casey testified that in April 2001 he had a formal meeting with Nacchio on his unit’s projections for the second quarter and the second half of the year. In response to the question: "What was the most important message you wanted to communicate during this meeting,” Casey replied that the IRU market was drying up and essentially for the second half of 2001, Nacchio should expect little or no sales of IRUs. This is important testimony because it shows that Nacchio was making statements in April of 2001 that Qwest would continue to make its numbers to the public when he knew from Casey that he could not rely on IRUs any longer as the quarterly gap filler.

In answering the question on what actually happened to the IRU market in the 3rd quarter, Casey answered that “Qwest had a few sales and none in the 4th quarter.” 

During the cross examination of Casey by Jeffrey Speiser, Casey’s credibility was attacked when Casey stated he was granted immunity and settled with the SEC for $2.1 million allowing him to keep the balance of the $35,000,000 realized from the sale of stock/options.