The Sentencing of Joe Nacchio: Identifying Victims, Insider Trading, and a "Mob Scene" at the Courthouse

The sentencing date for Joe Nacchio is getting closer, the event slated for July 27. The government has filed a motion to establish a "reasonable procedure" for notifying crime victims of the hearing. The motion is posted on the DU Corporate Governance web site.  The motion is designed to make victims aware of the sentencing and provide a possible opportunity to speak at the hearing.

The motion lists as victims not only those who traded with Nacchio in the transactions that resulted in the guilty verdicts but also those who "may have been affected by Mr. Nacchio's conduct" and shareholders of Qwest who "had an interest in avoiding the legal and reputational injury resulting from the conduct".  In describing the relevant procedures, the government noted the logistical difficulties in contacting the shareholders who actually bought the shares sold by Nacchio.

• "It would be extraordinarily difficult and expensive even to attempt to contact the first subgroup — i.e. , those who purchased stock directly from Mr. Nacchio between April 26, 2001 and May 29, 2001. In connection with the counts on which Mr. Nacchio was found guilty, he sold 1,330,000 shares of Qwest stock. See Docket No. 412, Att. 2. Identification of individual purchasers would be further complicated by the fact that many, if not most, Qwest shares would be held in “street name” — i.e. , the brokerage firm would hold the investor’s securities in its name or another nominee, but would keep internal records reflecting the identity of the beneficial owner. Therefore, even if the Government were to contact the nominal group of purchasers, this group would not accurately reflect the actual investors. Because of these hurdles, contacting the actual investors for all of the trades at issue in the counts as to which Mr. Nacchio was found guilty would be extraordinarily expensive." (footnote omitted).   

The government, therefore, proposed that notice be provided by letter to class counsel in the shareholder class action, counsel for Qwest, and the Association of US West retirees, that a notice be published in the Rocky and Denver Post, and that a press release be issued to other publications, including the Wall Street Journal. 

The defense team filed a response two days later, accusing the government of fomenting a "mob scene."  The response pointed out that "there are no identifiable persons who would be able to establish that they actually purchased the shares that Mr. Nacchio sold on any given day."  Finally, the defense contended that the true motivation was to "Incite the many residents of this community that harbor ill will toward Mr. Nacchio, people who blame him for much more than was decided by the jury, to come forward to demand that strong punishment be meted out by this Court."  The response is posted on the DU Corporate Governance web site.

To some degree, the defense is right.  The government opted to prosecute Nacchio for insider trading, not false disclosure to the market.  The victims are not those who relied on Nacchio's behavior but those who bought the shares that Nacchio sold.  The attempt to broaden the list of victims, therefore, goes well beyond the government's theory of the case.  Moreover, the evidence at trial suggested that Nacchio sold his shares in impersonal market transactions.  Thus, any shareholder who bought on one of the days in question has no idea (and cannot prove) that Nacchio was the seller. 

Perhaps Judge Nottingham will allow a representative group of shareholders to testify.  It would have been preferable to simply contact those who traded on the dates Nacchio was found guilty of insider trading.  The government indicated that it could not do this because of the "hurdles" associated with street name ownership.  In fact, brokers routinely produce lists of beneficial owners (in connection with all annual meetings, for example) and would likely have little difficulty providing them to the government in this case.  It would, however, take time and many of the investors may have closed their accounts and would be difficult to find.  With the hearing only a month away, time is not something the government has.