Handicapping the Joe Nacchio Trial

The government rested this week, requiring almost nine full days of testimony.  The case, which had been described in the opening statement as "fairly simple" was anything but.  The government had to prove that from January through May of 2001, Joe Nacchio traded while in possession of material inside information. 

In general, this meant showing that Nacchio knew that the earnings guidance issued on September 7, 2000 and restated numerous times thereafter would not be met.  See Qwest Current Report Filed on Form 8-K, filed on Sept. 8, 2000 ("For 2001,  Qwest  expects  to achieve  revenue  of $21.3 to $21.7  billion, exceeding the previous  projection of $21.0 billion;  EBITDA is expected to be $8.5 to $8.7 billion, exceeding the previous projection of $8.5 billion (particularly that earnings would grow 15-17%, with Qwest finishing the year at $21.2 billion)"). 

Nacchio's knowledge (at least what the government showed) evolved.  In late 2000, he knew that the guidance was aggressive and that division heads were complaining about the top down targets imposed on them.  It showed Nacchio to be a demanding, even harsh, boss but not someone who necessarily knew that the company couldn't meet the aggressive forecasts.

In April, however, things were different.  The first quarter numbers were in.  He got another series of warnings and expressions of concern.  The necessary growth in recurring revenue was not happening.  Moreover, at least some of the operating divisions could see that they weren't going to make the targets in recurring revenues for the second half of the year because those earnings largely depended upon orders already in the pipeline. 

It may well have been that Nacchio still hoped to make the annual numbers but it seems clear that by April or early May he should have known that there was a real possibility that Qwest would not.  Nonetheless, the case was open to rebuttal that Nacchio still thought he could make the numbers with, for example, top secret contracts coming from government agencies (the black box defense). 

Towards the end of the case, the government presented evidence from two analysts that the failure of Qwest to disclose the amount of revenue generated by IRUs and other "one timers" in the first quarter was material.  One of the analysts indicated that in conversations with people at Qwest he was led to believe that reliance on these transactions was declining and had become almost insignificant.   

These witnesses were not so much challenging Qwest's ability to make it's numbers, the heart of the government's case, but were taking the position that the source of the revenues mattered (that recurring revenues were more important than one-timers).  The testimony was effective because it did not depend upon showing when Nacchio knew that the company's projections were no longer viable (a slippery slope, for sure) but instead made the case that a very specific piece of information (the magnitude of the IRU sales) was not told to the market.  To the extent the jury convicts, it will likely be on the basis of this fact.

It looked like the government got to the end of its case ahead on points but without a knockout, still vulnerable to a strong defense.  The black box defense might provide some support for a Nacchio belief in April that Qwest could still make its numbers.  Testimony from other analysts or investors might have raised doubts about the materiality of the IRU revenues.  But it looks like none of that will happen.  On Thursday, the defense called two witnesses (the founder of Qwest and an Abbott) and was denied the right to call Daniel Fischel, the former dean of the University of Chicago Law School, as an expert (although he will appear later to do a summary of evidence). 

It looks like the defense will wrap up on Monday unless Nacchio testifies (the defense has until 5:00 pm (on Saturday) to make that decision).  In some respects, the brevity of the defense may indicate confidence, a demonstration to the jury that it can rebut the government's case in a fraction of the time.  But if so, it's a risky strategy.  The government's strong finish is still fresh in the minds of the jury. 

We will see what happens next week, particularly whether Nacchio will testify.  Critical decisions will be made over the weekend.  In the meantime, at what is apparently the penultimate week of this trial, the government appears to be ahead on points.