The former head of investor relations at Qwest admitted Wednesday he sold stock based on insider information in early 2001 but stopped because he had a "crisis of conscience."

"I knew deep down that I had material information . . . and I knew it was wrong," said Lee Wolfe, the prosecution's first witness in its insider-trading case against former CEO Joe Nacchio.

Wolfe, testifying under a partial immunity deal with the government, said he sold 20,000 shares between January and April 30, 2001, for a profit of $646,000.

He stopped because it had become clear Qwest was relying too heavily on revenues from one-time sales of space on its network and the company would have trouble reaching its aggressive revenue targets, he said.

"I should not have done it," he added. "It was wrong even in January."

Nacchio is charged with 42 counts of insider trading - one for each sale of his own stock that he made between January and May 2001.

Prosecutors claim that, like Wolfe, Nacchio knew the one-time sales weren't sustainable and should have disclosed that information to shareholders. Instead, he cashed in nearly $101 million in shares.

Nacchio's defense attorneys argue he had to sell because his stock options were scheduled to expire and the board of directors wouldn't let him hold onto them. Attorneys also said Nacchio believed the company could reach its goals and the numbers he was giving Wall Street were reasonable.

Under cross-examination, defense attorney John Richilano accused Wolfe of testifying against Nacchio just so Wolfe wouldn't be charged with a crime and sent to jail.

"You're not cooperating out of a sense of good citizenship here, is that fair?" Richilano asked.

Wolfe admitted he was most concerned about criminal charges but also said, "I've been telling the truth."

Richilano also noted Wolfe had followed Nacchio to Qwest from AT&T, where they both worked previously, and he was aware Nacchio's management style was to push his managers and employees to exceed expectations.

It was that style, Richilano said, that helped the company succeed and enabled Wolfe to earn about $1 million in stock sales in 2000, in addition to the $646,000 in 2001.

Under questioning from assistant U.S. Attorney Leo Wise, Wolfe also testified that investors and analysts in late 2000 and early 2001 were skeptical of how Qwest would make its numbers, particularly since the economy was heading south and other telcos were lowering their targets.

"There was a suspicion that there was something funny here," Wolfe said.

Analysts repeatedly asked Qwest for more detail on how it was making its numbers, and repeatedly, Nacchio told them it was because of Qwest's superior product line and managers - not the one-time sales, Wolfe added.

Wolfe also said he had discussions with Nacchio in early 2001 in which he encouraged the CEO to hold onto his stock.

When Wise asked why Wolfe did so, he responded: "When a CEO sells stock in a company, the concern in the investment community is that the CEO knows something bad about the company that investors don't know."

THE DAY'S HIGHLIGHTS

• Lee Wolfe, Qwest's former investor relations director, testified he stopped selling stock on April 30, 2001, because he "knew it was wrong."

• Wolfe also testified investors and analysts repeatedly wondered how Qwest could make its 15 percent to 17 percent annual growth targets when other telecommunications companies were lowering their forecasts. He said Nacchio refused to lower those targets or disclose that Qwest was relying on one-time deals to make its numbers.

• On cross-examination, Nacchio attorney John Richilano suggested Wolfe tailored his testimony to avoid prosecution on insider-trading charges. Wolfe said prosecutors agreed not to charge him as long as he told the truth.

• The defense has added Richard Clarke, a former White House anti-terrorism chief, to its witness list. Clarke, who also served as a special adviser to President Bush on cybersecurity issues, spoke to the National Security Telecommunications Advisory Committee, which Nacchio chaired when he resigned from Qwest in 2002.

UP NEXT

• Defense will continue its cross-examination of Lee Wolfe, Qwest's former investor relations director.

• Prosecutors are expected to call a former employee who bought stock every two weeks in early 2001 based on Nacchio's positive communications about how Qwest was doing. Defense already has objected to the witness. Judge Nottingham said he would limit the testimony to the events during the first five months of 2001 and indicated he's not going to allow a "parade of victims."

burnetts@RockyMountainNews.com or 303-954-5314

Back to Top