Day 8: Judge Nottingham Rules on Testimony of David Weinstein

There was a slight delay this morning due to inclement whether.  Judge Nottingham decided to start the day by ruling in favor of the Defense regarding the testimony David Weinstein on Nacchio's transfer of 90 Million in Feb. 2002 to an account in his wife's name.  Judge Nottingham cited to Rules 404(b), 401, and 403 in making his decision. 

With regard to Rule 404(b), the government's argument was that because the transfer of funds was motivated by Nacchio's desire to avoid loss, and because this is related to the same desire that motivated the insider trading, the testimony is indicative of the consciousness of wrong doing and should be admitted due to similarity of actions.  Judge Nottingham disagreed.  Specifically, he did not see how the two acts were similar temporally as they took place 10 months apart from one another.  Furthermore, Judge Nottingham noted that the two transactions were insufficiently similar in order for the court to consider them as part of the common scheme of the crime in question. 

The government also argued that testimony was admissible under Rule 401 because the transfer of funds supports the inference of a guilty conscience.  Judge Nottingham was not convinced by this argument either, noting that while such a transfer may indicate a guilty conscience, it may also indicate Nacchio became aware of the fact that he may be facing charges regardless of guilt and that Nacchio may have transferred the funds in preparation for possible civil actions against him.  Judge Nottingham did not want to allow the testimony as he felt doing so would influence the jury to find Nacchio guilty for "reasons other than insider trading."

After the ruling the Defense proceeded with its cross examination of Schumacher, former CFO of National Mass Markets (NMM) and former Controller of Qwest.  The highlight of today's cross came when Jeffrey Speiser played a video recording of Betsy Bernard speaking at an October, 2001 conference at which time she stated that she was absolutely confident that Qwest was going to continue to grow at a double digit rate.  While Schumacher was not present at this October conference, the video tape created some inconsistency in yesterday's testimony made by Schumacher regarding statements made by Betsy Bernard at other meetings.

On re-direct, Colleen Conry again asked Schumacher about his stock options.  Schumacher testified yesterday that he did not exercise because of concern about not disclosing to the market about the IRUs.  The Defense suggested that his real reason was that most of the options were not in the money.  Schumacher indicated that at the time in question his options were in fact "in the money" but that he did not exercise his options out of concern that doing so would be improper. 

The government next called to the stand James A. Smith, former CEO and President of Qwest Dex (telephone book business), and former Executive VP of Consumer and Small Business at US West.  Cliff Striklin asked repeatedly about the projected targets for 2000 and 2001 and Qwest's inability to meet those targets.  Among other things, Smith testified that he had many conversations with Nacchio regarding the revenue shortfall, and the need to adjust the targets so Qwest employees could receive their bonuses. Smith testified that the targets were set so high that he did not consider them a "stretch" but rather unattainable. 

During his testimony, Smith discussed the publication of the telephone books, and how revenue from the publication is accounted for at time of publication and distribution.  He then testified that, when Nacchio was told about the revenue shortfall for 2000, a decision was made to publish and distribute the phone books in December of 2000, instead of January 2001 (when it is usually scheduled for publication) in an effort to boost revenue for 2000.  In his testimony Smith stated: "I was very concerned about the movement of the publication date" questioning whether such a shift was appropriate.  Smith further testified that by moving revenue in this way in order to meet targets in 2000, Qwest would not be able to meet targets in 2001, stating: "we were robbing Peter to pay Paul."

On cross examination, Speiser made more of an effort to discredit Smith as a witness, rather than the substance of his testimony.  First, by asking if Smith was facing any criminal charges, to which Smith answered in the negative. Then Speiser asked if Smith was able to keep the profits made from exercise of his options during that time, to which Smith answered "well, I went through a divorce…"  After which Smith indicated that with the exception of what he lost in the divorce, he was allowed to keep all of his profits.  Speiser questioned Smith about his relationship with Nacchio, specifically about the fact that Nacchio was unhappy with Smith's performance. 

Speiser's brought his cross to completion by asking if Smith could have contacted the board of directors regarding his concerns with the unattainable targets, and whether doing so would have placed his position at Qwest in jeopardy.  Smith answered in the affirmative, but was contradicted when Speiser read the transcript of his testimony to the Grand Jury, when Smith testified that contacting the board of directors would not necessarily jeopardize his position at Qwest.

Over all, it was an action packed morning.  The government is sticking to its methodical approach, but Stern's motley crew seems to have picked up some steam and did a good job of giving the government a run for their money.