Amicus Curiae Brief of Washington Legal Foundation

We continue our discussion of the appeal by former Qwest CEO Joseph Nacchio, whose hearing before the 10th Circuit Court of Appeals is now less than a month away. Today we examine the amicus brief filed by the Washington Legal Foundation (WLF). Brief of Washington Legal Foundation, as Aimcus Curiae Supporting Appellant, United States v. Joseph P. Nacchio, No. 07-1311 (10th Cir. filed Oct 9, 2007). The WLF is a Washington-based think tank that generally supports free market principles and generally opposes government regulation of corporations. The group seeks the reversal of Mr. Nacchio’s conviction on several grounds.

The WLF’s brief asserts that the jury instructions as issued by Judge Nottingham were erroneous in two respects. First, the brief argues, the instructions failed to provide sufficient guidance to the jury on determining the materiality of non-public information when that information is "soft" due to its nature as a projection of future earnings. The WLF also challenges the instructions with regard to scienter, arguing that the instructions misstated the law and confused the jury.

In arguing that the instructions Judge Nottingham issued to the jury on materiality were in error, the WLF suggests that the court should have instructed the jury that in order to be material, the new soft information (for example, officers increasingly warn Nacchio that the estimates would be hard to achieve) would have rendered Nacchio’s public projections to be considered without a reasonable basis. The WLF argues that the court’s instruction was weaker than even the government’s proposed instruction that non-public information is material when it is:

substantially likely that a reasonable investor would have viewed the information as significantly altering the total mix of information made available concerning the company.  Id. at * 6.

The brief reiterates arguments made by defense counsel during trial that the instructions on materiality in this criminal case should have been at least as strong as the typical civil instructions on materiality.

The amicus brief delineates a list of reasons why the informational benefits to investors that arise from forward-looking statements necessitate a strong “safe harbor” exception to "materiality," arguing:

Any criminal prosecution for insider trading premised on the possession of soft information that allegedly undermines a prior publicly made projection must ensure that that the soft information at issue is ‘material’ as a matter of law by requiring that the Government prove that the prior statement no longer has a reasonable basis. Allowing the materiality of such information to be determined by a jury without a framework obligating it to determine materiality with regard to the specific content of the prior statement….pays no heed to the acknowledged public policy…to protect and encourage the dissemination of forward-looking information.  Id. at *15.

The WLF asserts that a failure by the Tenth Circuit to find the materiality instruction as reversible error could create a precedent that will discourage corporations from making forward-looking statements in the future.  Id. at *16.

The WLF’s brief also argues that Judge Nottingham’s instruction on scienter was erroneous as a matter of law and was ultimately harmful to the defense. The brief cites the relevant portion of the court’s instructions:

A defendant does not act in good faith if even though he honestly holds a certain opinion or belief if [sic] he also knowingly employs a device, scheme, or artifice to defraud

The WLF argues that this instruction is not only misleading, but also that the instruction opened the door to an argument that non-related acts of dishonesty could negate the defendant’s good faith defense. The brief further opines that the instruction was, in fact, harmful, because it aided the government’s argument during closing that a distinct and unrelated act of dishonesty negated Nacchio’s good faith defense for insider trading.

The Washington Legal Foundation’s amicus brief and other materials related to the Nacchio case can be found on the DU Corporate Governance website.