Nacchio’s Puzzling (Innovative?) Defense

Cite this Article
Thomas A. Lambert, Nacchio’s Puzzling (Innovative?) Defense, Truth on the Market (January 24, 2006),

An article in today’s W$J reports on former Qwest CEO Joseph Nacchio’s planned defense in a criminal insider trading action brought by the SEC. The defense is perplexing.

The SEC has accused Nacchio of selling $101 million of Qwest stock while in possession of inside information that the firm wasn’t doing as well as its public statements would suggest. The Journal reports that

Mr. Nacchio’s attorneys have said in court that his defense will rest partly on a claim that he expected the company to do well despite its difficulties because he had secret information about classified, national security-related contracts he believed Qwest would win.

Come again? Is Nacchio claiming that it was OK for him to sell while in possession of material non-public bad news regarding company prospects because he also possessed material non-public good news? Is this a “two wrongs make a right” theory? Or is Nacchio saying that he shouldn’t be liable because he was really attempting to (irrationally?) hurt himself by selling while in possession of material non-public good news? The defense is odd.

In an attempt to figure out what Nacchio’s strategy is, I took a look at some recent filings in the case. In a document filed on January 18, Nacchio’s lawyers state:

The “material” information Mr. Nacchio is alleged to have possessed at the time of the stock sales in question (January 2 – May 29, 2001) related to the company’s ability to achieve its quarterly earnings targets. Thus, in order to prove the charged offense of insider trading, the government must prove not just that securities fraud was taking place at the company in the release of misleading financial information to the public, but that it was taking place with Mr. Nacchio’s knowledge prior to his sales of Qwest stock. This alleged inside information must be “material.”

Based on this statement (which is itself perplexing), I surmise that Nacchio’s defense (or this part of it, at least) is that two “wrongs” do make a right because the second piece of non-public information to which Nacchio was privy when he traded (i.e., the likelihood of the lucrative defense contracts) would make the first piece (i.e., various bits of bad news at the company) immaterial. In other words, the theory seems to be that the totality of non-public information of which Nacchio was aware would not be something a rational investor would consider important in deciding how to invest (and thus would not be material), for Nacchio’s private negative information was counterbalanced by private positive information.

Interesting. We’ll see where it goes. (I’m not optimistic for Nacchio.)

If anyone has other theories regarding Nacchio’s planned defense or knows of any decisions evaluating this “two wrongs” theory, please let us know.