Say It Ain't So, Joe

Spend enough time reading business headlines, and you'd be forced to conclude that CEOs are unwitting pawns victimized by oppressive regulators. Witness the know-nothing plea from former Qwest (NYSE: Q  ) CEO Joe Nacchio. In a filing last week here in Denver, Nacchio's attorneys said that fraud charges brought by the Securities and Exchange Commission are groundless because they focus on Nacchio's public statements, rather than insider knowledge of an accounting scheme.

Specifically, the statement argues that the SEC "...failed to allege any facts showing that Nacchio circumvented or failed to implement a system of accounting controls at Qwest (much less that he did so 'knowingly,')" according to a recent story in TheDenver Post. Hmmm, sounds bad. Maybe we ought to review the actual charges against Nacchio.

The government's complaint alleges that Nacchio and others misled investors by mischaracterizing one-time asset sales as recurring revenue in public statements. And that, says the SEC, constitutes fraud. Nacchio's attorneys disagree, of course, saying in the filing that it is impossible to "verify objectively (Nacchio's) subjective remarks."

Really? Let's take just one, from December 2000. In this press release, Nacchio said he was reaffirming guidance for revenue and earnings before interest, depreciation, taxes, and amortization (EBIDTA) for 2000 and 2001. Why? He apparently wanted to make it clear that Qwest was in better shape than ailing competitors.

Now look at the key quote: "Qwest believes it is not having the same problems announced by several competitors because Qwest has newer assets, a lower cost position and a product line targeted to capitalize on the high-growth sectors of the industry." Nice.

Fast-forward to 19 months later. In July 2002, barely a month after Nacchio resigned, Qwest announced it would need to restate earnings for 1999, 2000, and 2001. Why? Qwest's questionable accounting policy regarding capacity and asset sales.

Did Nacchio know Qwest's asset sales were being misclassified as he guided towards higher earnings? I have no idea. But we may know soon. Reuters reports that former Qwest CFO Robin Szeliga has agreed to plead guilty to insider trading and will cooperate in the ongoing investigation, acknowledging that she knew the company wasn't as good as management had led investors to believe. Prosecutors' willingness to cut a deal with her suggests there's at least something worth pursuing.

Nacchio says his comments were just optimistic puffery. Maybe, but his so-called irrational exuberance helped him earn more than $176 million in stock-sale profits over the period the SEC is investigating. At best, he's just another pump-and-dumper -- except that he isn't. Only Nacchio was capable of moving Qwest's stock up by double digits with his statements. Go back to the press release mentioned above. The day Nacchio suited up as Professor Positive, the shares responded by rising more than 10%.

Things just don't look good for Joe. He claims he didn't know of any wrongdoing. That's so Ebbers. But even if Joe is right, and he's guilty of nothing more than excess optimism, who benefited? Joe did. Millions of Joe Oddlot investors didn't. And that alone is shameful enough.

Jonesing for other securities fraud folly? Try these:

Fool contributorTim Beyersthinks the best punishment for rich crooks is to make them poor. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile, which ishere. The Motley Fool has adisclosure policy.


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