Nacchio Trial - Afternoon Blog (Day 8)

The afternoon focused principally on the government witness, David A. Weinstein, Nacchio’s financial advisor, giving textbook lessons on financial and estate planning for the rich.

It was also an afternoon marked by battling prior judges, Stricklin for the prosecution and Stern for the defense. In the morning, Judge Nottingham had ruled that he would not allow into evidence information related to a transfer of assets (90,000,000 in stock value) to his spouse in 2002. However, since Stern had opened up the issue of family assets and Nacchio, he ruled that Stricklin could pursue this line of questioning along with interactions with Nacchio during the relevant times.

Weinstein testified that his education included accounting and law but that he specialized in securities investment, life insurance, and estate planning. Until near the end of Nacchio’s tenure at the company, Qwest paid the cost of the investment fees Nacchio incurred to Weinstein (who worked for Goldman Sachs). Weinstein has known Nacchio since 1986 and when Nacchio rose to an executive position at AT&T, Nacchio became a client of Weinstein’s.  Weinstein has typically had as clients about seventy-five high end corporate officers, especially CEOs, throughout the country.

Weinstein also testified that Nacchio was a very “astute” investor. After conferring with Nacchio, Weinstein would always dictate a memo of the conversation and send a copy to Nacchio. Weinstein made it abundantly clear that his favorite word is “diversification” since he always recommended that CEOs sell their stock or exercise their options and sell whenever the opportunity arose under the old adage: “One should not put all your eggs in one basket.” Weinstein stated that Nacchio was so bullish on the future value of the Qwest stock, but convinced Nacchio in early 2001 to engage in a new SEC plan to create a safe harbor in selling Qwest stock even at times outside of the allowable window for insiders to sell at Qwest. The plan is called a 10b-5(1) plan that Weinstein represented as an irrevocable commitment to sell on a prearranged basis regardless with what happens to the stock price. Nacchio started the 10b-5(1) calling for a daily sale of his growth stock (11,500 shares a day).  However, Nacchio stopped the plan soon thereafter. Weinstein testified that he did not know why.

Stricklin had Weinstein go through Nacchio’s balance sheets that Weinstein prepared in December 2000 to enable him to better advise Nacchio. The network totaled $547 million, including about $70 million in cash. Weinstein said the $547 million included 277,000,000 in unvested stock options.

Stern’s cross began with him lumbering up to the podium and requesting his characteristic few minutes to get things ready. Once collected, Stern revved up and fired off questions relating to Weinstein’s meeting with the government lawyers and his refusal to meet with the defense team. If Weinstein was such a good friend to Nacchio, Stern hammered, why avoid his lawyers? Notably flustered, Weinstein stammered that it was an awkward situation and that since the government had talked to him first, he felt pulled by two sides. What if, Stern asked, we had talked to you first? Weinstein said he didn’t know. Nacchio smiled during the exchange.

Stern then proceeded to elicit from Weinstein testimony that Nacchio often did not follow Weinstein’s advice to diversify by selling more Qwest stock because he believed in the company. Some key exchanges relating to this included:

• Weinstein agreeing with Stern that Nacchio was consistently “bullish” with respect to Qwest’s stock value through the 2001 period
• Weinstein admitting that Nacchio had never said anything about the prospects of Qwest that he did not disclose to the public.
• Weinstein’s wanting Nacchio to exercise the stock option and sell, but in July, 2000 Nacchio instead conveyed some 90 thousand shares worth approximately $7 million to his children via a Family Ltd. Partnership. Why, Stern asked, would Nacchio make the gift, pay some $2 million in gift tax, and not sell the shares if he expected the shares to depreciate? Weinstein admitted that it would not make sense.
• Nacchio had some 500,000 personal shares that he did not sell even though the stock price was going down.
• Even when share prices were falling, Nacchio told Weinstein that he believed in the company and that the industry would recover. When Stern asked Weinstein if he thought Nacchio was telling the truth, Weinstein said, “Yes.”
• Weinstein advised Nacchio in 2001 to enter into an exchange fund, but Nacchio however refused until the stock reached $50.

Stern’s remaining notable exchange with Weinstein attempted to clarify that much of the wealth discussed in the net worth statements concerned “unvested” stock options, and that these options were at that point technically worth no money. Weinstein admitted that the net worth statements were more an investing allocation tool than an exact amount of money that Nacchio actually had available.

The final question of the day to Weinstein was remarkable. On redirect after Stern’s cross, Stricklin asked Weinstein: “Did there come a time when Nacchio asked you to assist him in a dishonesty against Qwest.” Weinstein replied “Yes.” Stricklin then ended his redirect examination of Weinstein!

As the day neared a close, the government called Afshim Mohebbi, former President and COO of Qwest. Stricklin started out light, covering Mohebbi’s background – Mohebbi’s move from Tehran in 1978, his meteoric education in California, his employment with PacBell and British Telecom – before his move to Qwest in 1999. Stricklin also asked about Mohebbi’s agreement with the Justice Department - Mohebbi apparently has immunity to testify under a 2005 agreement.

At 43, Mohebbi appears incredibly youthful at the witness stand. But as Mohebbi covered the early days of the merger between Qwest and US West, his soft voice and articulate manner displayed confidence while responding to Striklin’s questions. Mohebbi described the merger at one point as “not friendly” as Stricklin’s questions revolved around the market reaction to the merger. Mohebbi testified about Nacchio’s concern concerning the falling stock price of Qwest due to the merger and how Nacchio and he attempted to assuage large institutional Qwest investors as to the benefits of the Merger. When Stern challenged Stricklin as to the relevance of the line of questioning, Stricklin indicated that the government wanted to establish Nacchio’s motive from this period forward to set favorable numbers from this period till 2001.

Judge Nottingham stopped the trial at that point. Check back with the blog on Monday for continuing coverage.