The Nacchio Appeal: Part 3 (The Materiality Issue)

The panel (judged McConnell, Holmes and Kelly) asked numerous questions.  They appeared mostly concerned about two issues:  materiality and the decision to exclude an expert, Daniel Fischel, without a hearing.  Perhaps surprisingly, the jury instruction issue (whether the trial judge should have given a "reasonable basis" instruction) proved almost irrelevant. 

On the materiality issue, the panel focused on information received by Nacchio after the first quarter suggesting that there would be a $300 million shortfall in recurring revenues.  Nacchio learned in April that the national mass markets unit of the business (described in the government's brief as the "biggest source of recurring revenue") would miss its target by $323 million.  The panel viewed this as the material non-public information possessed by Nacchio when he traded and at least two judges (McConnell and Kelly) had reservations about the materiality of the information.  Judge Kelly wanted to know what rule should be written into the opinion that would give executives guidance in the future, particularly when the consequence was criminal prosecution.  Judge McConnell reiterated the point, noting that "surely" executives "were entitled to some guidance." 

The panel did acknowledge that smaller amounts could be material if qualitative factors were present, and there was some brief discussion of the factors listed in SAB 99.  Judge McConnell tried to get Oestreicher to admit that $300 million was immaterial absent qualitative factors, which he refused to do. 

Despite these concerns, it would take a relatively audacious court to overturn the jury on this basis.  Plenty of qualitative factors are present.  At trial, the government presented plenty of evidence indicating that the market was highly sensitive to the projected growth rates of Qwest and the nature of the revenues (recurring v. one-timers).  Moreover, as Oestreicher noted in oral argument, Nacchio himself said that missing forecasts by even $50 million would result in a 20% drop in share prices.