Nacchio Not Out of the Woods Yet

As an appellate lawyer, Maureen E. Mahoney, a partner in the Washington, D.C. office of Latham & Watkins, seems something of a miracle worker.

In his long New York Times Magazine feature on the pro-business stance of the Supreme Court, Jeffrey Rosen lauded Mahoney for her work representing the accounting firm Arthur Andersen after it was charged in the Enron affair.

Rosen said she presented an "absolutely dazzling" argument on why Arthur Anderson should not have been convicted of obstructing justice. He called it "one of the best oral arguments I've ever seen at the Supreme Court."

Mahoney has worked her magic again: This morning, the 10th Circuit Court of Appeals in Denver reversed the conviction of Joseph Nacchio, the former chief executive of Quest Communications International, on 19 counts of insider trading for selling millions of dollars of stock in 2001 while knowing of trouble with the company's finances.

Mahoney convinced the appeals court that the exclusion of economic analysis from testimony of a defense expert, Daniel Fischel, an emeritus professor at the University of Chicago who is now an economist with the consulting firm Lexecon.

Fischel's testimony would have included a discussion of the economic incentive that inside information would have given Nacchio, the statistical significance of the differences in his trading patters, and the likelihood that economic diversification better explained the challenged sales than inside information.

District Judge Edward Nottingham of Denver concluded all of these things were "within the common knowledge of the jury." The 10th Circuit disagreed.

"The right of a defendant to call witnesses is crucial for testing the prosecution's case and defeating the charges against him," the court said. "The theory of Nacchio's defense was that the stock price was not affected by his disclosures, that his conduct had an innocent explanation, and that a reasonable investor would not have found his inside information very important."

In July, Nottingham sentenced Nacchio to six years in prison, but he has remained free on appeal. Prosecutors had charged 42 counts, calling it the largest insider trading case in history.

In July, when Nottingham sentenced Nacchio, he called the Qwest chief executive, a "classic Horatio Alger story," and an executive ultimately swayed by greed. Nottingham ordered him to pay $19 million in fines and forfeit $52 million he gained in illegal stock sales.

But Nacchio is not home free. The 10th Circuit found sufficient evidence for the government to retry him without violating the double-jeopardy clause. In fact, it rejected many of Mahoney's theories on why Nacchio's inside information would not have been material to investors.

The two sides disagree on the revenue shortfall predicted by Qwest's staff in April 2001. The defense put the number at $300 million or 1.4 percent of total revenues, while prosecutors put it at $900 million or 4.2 percent of total revenues. The Securities and Exchange Commission has a rule of thumb that 5 percent is material.

The 10th Circuit called it a "close question" but found it could not call the shortfall immaterial to investors. In fact, it held Nacchio to his own words. "Mr. Nacchio himself had said in January that the 'skittish market' was so 'mercurial' that even a $50 million shortfall would create a 15 to 20 percent drop in stock price."

Nacchio will face a new judge at his second trial. The 10th Circuit found it would be "unreasonably difficult to expect this judge to retry the case with a fresh mind."

by Karen Donovan