Stern's Unfinished Closing Argument

Part I of Stern’s Closing Statement

In his unfinished closing argument today, Herbert Stern, lead counsel for the defense, presented a consistent theme that Joe Nacchio should not be convicted because he did not engage in insider trading—rather, he was really a victim of circumstances. In essence, Stern argued that while there was an appearance of insider trading, there was no insider trading as a matter of law. Stern inferred that the government exploited this appearance issue to bring the case, a case that in his opinion should never have been brought against his client. Joe Nacchio was only attempting to preserve the compensation he rightly deserved—not to engage in insider trading. In sharp contrast, Conry painted Joe Nacchio as a man intent on “propping up a house of cards in order to dump his shares” in the first two quarters of 2001 to an unsuspecting public.

How was Joe Nacchio a victim of circumstances according to Stern? First, Nacchio was entitled to compensation equal to 3% on the one billion of growth in Qwest (approximately 30 million). Nacchio did not want the compensation to be paid in Qwest stock due him for the growth in Qwest prior to the merger under Nacchio’s leadership. Instead, Nacchio wanted to be paid in cash instead of the stock insisted upon by the Board of Directors. According to Stern, the point here is that Nacchio would not have been charged with insider trading for these “growth stock” sales on January 2nd and 3rd of 2001 if Nacchio only received cash as he requested. However earlier, Conry pointed out--”it does not make any difference to the purchasers of Nacchio’s stock how he received it”—the stock is nevertheless subject to the insider trading prohibition.

According to Stern, Nacchio was also a victim of circumstances from a taxation cash flow standpoint. Stern discussed how the 12 million in options Nacchio received in Qwest after the merger had a “short shelf life” of only 6.5 years and thus these options were “subject to a major defect.” Ordinarily, Qwest would have offered the options with a ten year life giving Nacchio more time to exercise the options. However, due to the short shelf life of the options, Nacchio needed to exercise the options quickly. Moreover, he could not just hold them due to the income tax on ordinary income based upon the difference between the stock’s fair market value and the option’s exercise price. According to Stern, the amount of tax owed upon the exercise of the option forced Nacchio to sell the stock immediately to pay the related tax.

Stern wanted to stress today that it is not “willful” use of material nonpublic information, an element of the insider trading offense, if Nacchio was merely trying to preserve his compensation he justly earned when he sold the resulting stock to pay the income tax. In essence, Stern argued that therefore Nacchio was not focused on defrauding purchasers of his stock, but indeed was focusing on a legitimate purpose for the sales.

On this issue, however, the jury still might be persuaded by Conry’s closing statement assertion that this argument does not give Nacchio a license to engage in insider trading--he could have exercised the options but not sold the shares while he possessed material nonpublic information that he was unwilling to share to the public. Although not mentioned by Conry, Nacchio appeared to have ample cash or easily convertible assets already to pay the income tax upon the exercise of those options, according to the balance sheet prepared by his financial advisor.

Stern also pointed that “It is not a crime to be optimistic.” According to Stern, such optimism is not misplaced given the number of consecutive quarters including the first and second quarters of 2001 in which the alleged insider trades occurred. Stern made it clear that the government had portrayed Nacchio as the one deciding to use the very aggressive 15% annual growth rate during 2000 and 2001. However, Stern wanted the jury to focus on the fact that after Qwest paid 31 million for the DLJ report during the time of the merger, this report was the source of the aggressive 15% annual growth rate projections. How effective this will play with the jury is questionable given the fact that the dates of the alleged insider trades occurred in 2001--long after the report was issued and after the government alleges that the evidence shows Nacchio received, but did not disclose, bad financial news from his CFO Szeliga, his president Mohebbi, and the heads of the business units of Qwest.

Tomorrow, Stern will probably cover in more detail the defense’s perspective on the government’s backdating evidence and Nacchio’s desire to leave the company during the time of the trades due to his family situation. Stricklin’s copious note taking during Stern’s closing statement indicates that Stricklin will address many of the points Stern made today.