Classified Government Information Holds up Insider Trading Trial

Joe Nacchio, a former CEO at Qwest Communications International Inc., is scheduled to go to trial in March on 42 counts of insider trading.^[1] He is accused of selling $101 million worth of stock in 2001 based on inside knowledge that the telephone company would be unable to meet revenue targets. ^[2]

Nacchio has pleaded not guilty and is free on bail. Each count carries a penalty of up to 10 years in prison and a $1 million fine. ^[3]

In 2001, Qwest reported total revenue of $19.6 billion, the year of the trades in question and of that, less than half of $322 million came from classified contracts, according to court documents.^[4]

Defense attorneys said Nacchio believed Qwest would get hundreds of millions of dollars worth of classified government contracts that would improve the company's financial future.^[5]

Prosecutors have been ordered to give defense attorneys any documents they would use to counter Nacchio’s potential use of classified government information. ^[6]

U.S. District Judge Edward Nottingham granted a defense motion seeking the prosecution's evidence, saying prosecutors must comply with laws detailing the fair exchange of evidence when it pertains to classified information. ^[7]

The defense strategy is based on documents that fall under the Classified Information Procedures Act, which allows attorneys and judges to review such documents behind closed doors to determine if they are significant enough to be used at trial. ^[8]

The Classified Information Procedures Act (the Act) was enacted several decades ago to counter a strategy used by defendants charged with spying who would threaten to expose national secrets unless the charges were dropped. ^[9]

Prosecutors argued in a motion filed this month that the evidence exchange rules outlined in the Act did not apply because the judge approved substitute evidence that can be used in open court. ^[10]

The judge rejected that argument and ordered prosecutors to provide evidence to the defense that it plans to use to rebut any classified information. ^[11]
The government attorneys said they have complied with rules governing traditional exchange of evidence under Federal Rule of Criminal Procedure 16, but Nacchio's attorneys said government attorneys have been slow to deliver, citing a report on a witness delivered two months after the interview was conducted.^[12] Prosecutors are required by law to provide the defense “Brady” material or evidence that could be favorable to the defendant. The Supreme Court ruled in Brady v. Maryland that the government must give the defense all material known to the witnesses or persons having knowledge of the case, which is exculpatory in nature or favorable to the accused or which might serve to mitigate punishment, including any evidence impeaching or contradicting testimony of government witnesses or instructions to government witnesses not to speak with or discuss the facts of this case with defense counsel.^[13]

Prosecutors said the evidence-exchange process had been slowed because some of the documents fall under the Act, which sets guidelines for viewing secret government documents. ^[14] Prosecutors said they must coordinate the documents with federal agencies that are involved and in order to view the contracts, attorneys for both sides and the judge received Justice Department security clearances. ^[15]

Separately, in a pending case, Nacchio is one of several former Qwest executives accused by the Securities and Exchange Commission in a civil case alleging they orchestrated a financial fraud that forced the company to restate billions of dollars in revenue.^[16]

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[1] Sandy Shore, Prosecutors Ordered to Turn Over Evidence in Former Quest Chief’s Insider Trading Trial, Associated Press, January 25, 2007.
[2] Id.
[3] Id.
[4] Id.
[5] Id.
[6] Id.
[7]Id.
[8] Id.
[9] Sandy Shore, Attorneys, Judge Discuss Nacchio Evidence in Closed Hearing, Associated Press, January 12, 2007.
[10] Shore, supra note 1.
[11] Id.
[12] Sandy Shore, Judge Keeping Nacchio Case on Schedule, Associated Press, January 27, 2007.
[13] 373 U.S. 83 (1963).
[14] Id.
[15] Id.
[16] Id.