As part of the Race to the Bottom’s continuing coverage of Joseph Nacchio’s legal saga, Professor O’Brien posted on the 10^th Circuit’s decision on Nacchio’s sentence. A three-judge panel remanded the calculation of Nacchio’s sentence to U.S. District Court for being excessive. The panel ruled the initial sentence improperly calculated Nacchio’s gains from insider trading. The amount gained from insider trading dictates the sentence length. If the U.S. District Court finds the gain was overstated, Nacchio’s sentence will likely shrink from its current six years.

As reported in the Denver Post, the Department of Justice will not to appeal the decision to remand the sentence. The Department of Justice had the options of asking the panel to review the decision, requesting an en banc review, or appealing the decision to the Supreme Court.

The Supreme Court did not resolve the appeal of Joe Nacchio.  The Monday list of matters (the last of the term) did not address the case.  As a result, it will be considered in the next term.  The WSJ has a story on the non-decision.  

It is hard to believe that the Court would take the case on the basis of the exclusion of Nacchio's last witness.  On the other hand, the case also raises the issue of materiality.  The Court may see it as a vehicle to further restrict the reach of Rule 10b-5, a philosophy by the Court articulated in Stoneridge.

The answer should be in September.

We are in the middle of the "director compensation project," a series of posts exclusively by students who show the amount of compensation paid to directors and the amount of compensation to the CEO (including perks).  Is there a relationship?  You decide.

In the meantime, we take a moment to provide an update on the conviction of Joe Nacchio.  Of particular interest, one of the judges on the Tenth Circuit, Mike McConnell, announced he was resigning and taking a position at Stanford.  Judge McConnell wrote the majority opinion in the Nacchio appeal, reversing the conviction, a decision that was ultimately overturned by the court en banc (with McConnell writing a vigorous dissent).  The motive for the change is unclear, although there are many possibilities (pay, regime change and the reduced possibility of a Supreme Court appointment). 

It is the case, however, that for most judges (the Delaware courts excepted), positions on the federal bench largely limit their ability to weigh in on the important legal issues of the moment out of concern over the appearance of bias or prejudgment.  Judge McConnell will have a much less constrained position as Professor.

At the Supreme Court, a series of amicus briefs have been filed on behalf of Nacchio.  Some of them are posted on the DU Corporate Governance web site.  They were filed by the Chamber of Commerce, the National Association of Criminal Defense Lawyers, and the Washington Legal Foundation, all of whom filed briefs in the lower courts.  We note that in one of the briefs, The Race to the Bottom, made a guest appearance.  In the brief filed by the National Association of Defense Lawyers and the New York Council of Defense Lawyers.  According to the brief:

• Even detractors of such testimony observe that the Tenth Circuit in this case has perhaps written “the final chapter in the era of excessive deference to economic analysis.” J. Robert Brown, U.S. v. Nacchio: The Death Knell for Special Treatment of Economic Analysis in Securities Cases?, TheRacetotheBottom.org, Feb. 26, 2009, http://www.theracetothebottom.org/nacchiotrial/us-v-nacchio-the-death-knell-for-specialtreatment-of-econom.html.

The government has until May 22 to file its response. 

In the district court, Nacchio has requested a new trial based upon evidence obtained in the civil action brought by the SEC.  He has requested a hearing.  The government has opposed the request for a new trial.

Joe Nacchio went to prison last Tuesday in Pennsylvania after the 10th Circuit and Justice Breyer denied his petition for certiorari. The only remaining issue, therefore, is whether the Supreme Court will hear the case.  A tantalizing suggestion in the Tenth Circuit opinion suggests that it will not.

The 10th Circuit order was issued by the same panel that reversed the lower court and ordered a new trial (before being overturned by the circuit en banc).  In other words, it couldn't be described as a court hostile to Nacchio.  In the order, the panel had this to say about Nacchio's petition before the US Supreme Court:

• Mr. Nacchio, on the other hand, maintains that he must show only that there is a reasonable chance that the Supreme Court will accept certiorari. Renewed Emergency Application for Release at 9-11; Reply Br. at 2. We need not decide this question, however, because the showing as to even the more lenient standard is insufficient: Mr. Nacchio has not shown that there is a reasonable chance that the Supreme Court will grant his petition.  (emphasis added)

This is no idle statement.  This comes from a panel that includes a Judge (McConnell) who takes pride in the fact that the US Supreme Court has taken five cases (Wikipedia says four but Judge McConnell noted at the University of Denver a few weeks ago that there was a fifth) where he has written an opinion (whether majority, dissenting or concurring) and the Supreme Court had decided in a manner consistent with those opinions and another judge who sided with Nacchio in the merit appeal and the earlier request for bail.  Having said that, as the commentator to this post notes, Judge McConnell did dissent from the decision to deny bail. 

And, right now, the panel is saying that the Court won't take the Nacchio appeal.

We have not been following closely the back and forth on whether Joe Nacchio should be released on bail pending the outcome of his petition for ceriorari in the US Supreme Court.  Nonetheless, we were aware of the 34 page opinion issued by Judge Krieger (federal district court in Denver and successor to Judge Nottingham) denying Nacchio bail and ordering him to appear at prison on Tuesday of this week.

In our review of the cert petition, we were highly critical of some of the legal arguments contained in the document, viewing them as either incorrect or overstated (that had Nacchio disclosed the internal projections at issue, other circuits would have "regard[ed] [the statements] as misleading and punish[ed] him for disclosing;" and that if the opinion was upheld, insiders "cannot buy or sell company shares ever.").  The arguments were presumably stated in such a fashion to attract the attention of the Supreme Court to the case.

As a result, we read with interest the opinion by Judge Krieger and viewed her characterization of the cert petition with interest.  She had this to say:

• At this point, some of the newly-formed arguments raised in the Petition appear to be strategically crafted to create the appearance of circuit split on issues of law with a hope of attracting the interest of the Supreme Court.  But in doing so, the Defendant has been forced to mischaracterize the holdings and reasoning of the Tenth Circuit panel and en banc decisions and to elevate dicta in cases from other circuit courts.

The case is on appeal to the Tenth Circuit where bail is unlikely to be granted then on to the Supreme Court.  From the looks of things, Nacchio will be reporting to prison on Tuesday as commanded by Judge Krieger.

The primary materials in this case can be found at the DU Corporate Governance web site.

Predicting what will happen to a cert petition is not always easy.  This case has a couple of things going for it.  Maureen Mahoney is well known to the justices and anything she authors will likely get a serious examination.  Likewise, the advocacy of Judge McConnell on the Tenth Circuit, a smart and conservative judge, will likewise cause some on the Court to pause over the case.  The closeness of the en banc (it was, after all, a 5-4 decision) also helps.  Finally, the case involves Rule 10b-5 and the Supreme Court expressed a willingness in Stoneridge to put an end to any more expansion of the antifraud provision.  The Court could decide that this case presents another opportunity to implement that agenda.

Weighing in against the granting of certiorari is that the case really doesn't raise particularly important legal issues.  It mostly turns on the facts.  The real question is not about the standard of materialty for internal projections but whether Nacchio had in his possession facts that indicated his projections to the market no longer had a reasonable basis.   A jury found that he did.  While it is possible to argue the facts either way (that the information was too uncertain, that the percentage of the shortfall was not enough to cross the materiality threshold), the jury found otherwise.  For the Supreme Court to come out in Nacchio's favor, it will have to find that the information known to Nacchio was immaterial as a matter of law.  This is unlikely.

Our prediction:  Cert denied.

Judge Nottingham continues to be the additional judge in the decision making process.  After laying out a series of legal arguments about the reasons for reversal, Nacchio's cert petition takes direct aim at the trial judge.  As the brief notes:

• As the en banc dissenters explained in detail, the majority mischaracterized the district court’s decision, ignored settled law, and ducked meritorious issues to gloss over obviously prejudicial errors by a district judge whose “sense of fairness toward this defendant” was very much in doubt, App.92a (McConnell, J., dissenting), and who openly displayed ethnic bias against the defendant and his counsel and recently resigned in disgrace in a lurid prostitution and obstruction of justice scandal.

While it seems fair game to argue that in a close case on the evidentiary issue, there was some evidence of unfairness towards the Defendant, the brief goes well beyond that.  It suggests that the Court ought to take a close look at the matter because of the moral turpitude of the trial judge. 

It is an interesting approach and one that ordinarily would be high risk.  Judges do not take kindly to aspersions cast on other judges.  Nonetheless, with someone as experienced in Supreme Court behavior as Maureen Mahoney, she must be thinking that in this case, the reference to the trial judge's out of the courtroom peccadilloes will attract the eye of some justices, perhaps those with an accentuated sense of morality and self righteousness.  One can only guess who that would be.

The cert petition takes the position that, based upon the 10th Circuit's holding, insiders "cannot buy or sell company shares ever."

This is another example of hyperbole masquerading as analysis. The sentence is only potentially correct if in fact an insider always knows inside information and cannot disclose the inside information to the public.

Nacchio was convicted of having inside information. The information was internal data suggesting that the forecasts he had issued to the public were no longer valid. Had Nacchio wanted to trade, he merely needed to tell this to the market. Had he disclosed that there was doubt about the validity of the external forecasts, he likely would have been able to trade (assuming there was nothing else going on that qualified as material).

Moreover, once disclosure occurred, Nacchio would have been able to sell shares with impunity. While insiders often come into contact with inside information that interferes with the ability to trade, the Commission has addressed this by allowing insiders to put in place non-discretionary trading plans under Rule 10b5-1. Had Nacchio disclosed that there was internal information suggesting the forecasts were no longer valid and then put in place a 10b5-1 plan, he would have been able to sell as many shares as the plan permitted.

The brief for certiorari also trots out the position that the 10th Circuit decision will result in less disclosure, discouraging the use of projections.

• It will also seriously discourage companies from issuing projections at all. Nacchio’s inside information was supposedly “material” here only because Qwest had first made public projections. Supra 13, 20-21. If making a projection can render internal forecasts and interim results “material,” and subject executives to criminal liability, without reasonable safeguards like those applied in Shaw and Wielgos, companies will not do it.

There are several responses to this. 

First, as most securities lawyers already know, the issuance of projections is already fraught with risk.  Projections must have a reasonable basis and, when proven wrong, are open to allegations of fraud.  Once issued, most securities lawyers likewise know that projections may require updating if ultimately they cease to be accurate.  That there may be liability for issuing projections and then trading on information that suggests the projections are no longer valid is already widely known and unlikely to be altered by anything in the Nacchio decision.

Second, the argument that companies may restrict disclosure is an old one, soundly rejected by the Supreme Court in Basic.  As the Court noted in that case:

• The final justification offered in support of the agreement-in-principle test seems to be directed solely at the comfort of corporate managers. A bright-line rule indeed is easier to follow than a standard that requires the exercise of judgment in the light of all the circumstances. But ease of application alone is not an excuse for ignoring the purposes of the securities acts and Congress' policy decisions.

Basic, 485 US at 236.

Finally, it is a strange argument to suggest that it was the internal forecasts that subjected Nacchio to criminal liability.  It was his trading that did that.  Had he not traded or traded after the information was disclosed, there would have been no criminal liability.

The main substantive argument is presented in a confusing fashion.  According to the brief:

• The Tenth Circuit’s materiality analysis conflicts with several other circuits, which have held that internal predictions and interim operating results are immaterial as a matter of law unless they establish a very strong likelihood that the company’s eventual reported performance will be substantially below what the market is expecting.

The first observation about the question is that it conflates several issues.  Internal predictions and interim operating results are entirely different types of information.  One is soft (predictions) and the other is hard (actual operating results).  The tests for each are different and cannot be conflated.  Moreover, the issue with interim operating results ordinarily centers not on materiality but on the duty do disclose.  When must companies, in between quarterly reports, disclose changes in interim financial results.  Finally, while the issue is pitched as the materiality of internal forecasts, the government will likely argue that what Nacchio knew was hard information that alerted existing, public forecasts.  In other words, the government will argue that this is not about internal forecasts at all.

Nonetheless, the brief argues that the standards for assessing the materiality of "predictive information" is murky and unclear and requires clarification.  The brief seeks clarity.  At the same time, the standard adopted by the Court ought to be high, with the brief contending that the "extreme departure" standard in the First Circuit is the appropriate one.

The case relies mostly on language from Shaw v. Digitial, 82 F.3d 1194, 1201-02 (1st Cir. 1996), a somewhat dated First Circuit case.  According to the brief, "[t]he First Circuit held that “soft” information like internal predictions is always immaterial."  Soft information is generally a category of information that encompasses projections and appraisals. 

It is a relatively extraordinary statement since most would recongize that in fact projections are extraordinarily material to those trading in the market.  Indeed, the very importance of the information is what makes the category of information such a difficult and sensitive disclose issue.  Given that, we povide the language from footnote 21, which does not say that soft information is always immaterial.

• 21 It bears reemphasizing that the plaintiffs' claim is sustainable only to the extent it relates to the nondisclosure of "hard" material information, as opposed to "soft" information in the nature of projections. See In re Verifone Sec. Litig., 784 F. Supp. 1471, 1482 (N.D. Cal. 1992), aff'd, 11 F.3d 865 (9th Cir. 1993); see generally 2 Loss & Seligman, supra, at 622 n.66. Although DEC had no obligation to disclose a forecast of results for the quarter in progress at the time of the offering, it was permitted to do so. If it had chosen to disclose such a forward-looking projection, and if the projection was made with reasonable basis and in good faith, it would have been protected by the SEC's safe harbor provision. See SEC Rule 175, 17 C.F.R. § 230.175; see also Arazie v. Mullane, 2 F.3d 1456, 1468 (7th Cir. 1993); Searls v. Glasser, 64 F.3d 1061, 1066 (7th Cir. 1995);  cf. Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, § 102, 109 Stat. 737, 749-55 (creating expanded statutory protection for forward-looking statements). Furthermore, had DEC chosen to disclose projected results, such a disclosure (if reasonable) could very well have rendered the "hard" interim information underlying the projection immaterial as a matter of fact or of law, unless the market would have had some reason to discredit the projection, thereby creating a substantial likelihood that a reasonable investor might still have found the underlying information important to the total mix of information available.

The footnote arose in the context of whether a company was required to disclose projections in a shelf registration statement and amounts to nothing more than the general view that, in general, there is no obligation to disclose internal projections in the first instance.  It does not deal with a situation where the company discloses a projection then obtains internal information suggesting that the projection is incorrect. 

Moreover, the remainder of the discussion of Shaw in the brief, oddly, does not involve projections at all but, as the brief notes, the standard for the disclosure of “'hard' intra-quarterly operating results the company."  In other words, it addresses when changes in earnings must be disclosed in between quarterly reports, not the standard for soft information. 

There is a split in the circuit.  Some courts have applied a "substantial certainty" standard in determining the materiality of projections, a standard reminiscent of the "agreement in principle standard" for merger negotiations that was done away with in Basic. But this case is not about when projections are material enough that non-disclosure would make another statement inaccurate or incomplete under the anti-fraud rules.  This case involves the standard for information known to an insider that suggests an existing, already disclosed projection is now inaccurate.  As a result, these cases do not help Defendant.

The oddest position taken in the brief is that had Nacchio disclosed internal projections, he might have been liable.

• Finally, in at least the Seventh and Ninth Circuits an internal projection cannot be released unless it is “reasonably certain,” a standard plainly not met here.  The Tenth Circuit is sending Nacchio to prison for selling stock without disclosing conflicting predictions (worries, really) by his employees that other circuits would regard as misleading and punish him for disclosing. This is terribly unfair, particularly when criminal conviction requires proof that the defendant knew the information was material, App.147a, and vividly illustrates the depth of confusion in the lower courts.

There are so many things to say about this statement.  The brief cites two cases, one from 1980 and one from 1981.  That alone should suggest that the proposition warrants careful examination.  Both, for example, predate Basic, the Supreme Court's most relevant exposition of materiality.  In that case, the Supreme Court expressly rejected this rational.  See Basic, 485 U.S. at 234 ("Disclosure, and not paternalistic withholding of accurate information, is the policy chosen and expressed by Congress.").

Second, the cases hardly provide meaningful support for the proposition.  The primary case, Panter v. Marshall Field & Co., 646 F.2d 271, 292 (7th Cir. 1981), contained one critical sentence in what would have to be described as dicta.  See Id.  ("However, projections, estimates, and other information must be reasonably certain before management may release them to the public.").  The case was not dealing with liability for disclosure but liability for non-disclosure.  In other words, the sentence was at best an imprecisely drafted phrase indicating that internal projections did not have to be disclosed unless reasonably certain, not a sentence imposing on a company liability for disclosing such information. 

Third, and most importantly, the proposition conflicts with basic principles of securities laws.  The federal securities laws are built around the notion of accurate and complete disclosure, not merit review.  The cert petition suggests that there are some categories of information that are absolutely prohibited from disclosure.  This is simply wrong.  Companies can disclose information, even if highly tentative and speculative (they do it all the time) if accurately characterized.  Thus, if projections were disclosed that were not "substantially certain," a company could disclose the information but make very clear the tentative and preliminary nature of the information.

In other words, in this case, when Nacchio had repeatedly made forecasts to the market, the brief suggests that once he learned that the forecasts might not be achievable, the company might have been liable had it disclosed this negative information to the market.  Surely no serious securities lawyer would tell a client that it would be liable for revealing to the market that published forecasts no longer might be valid, even if the basis was tentative.

Finally, the approach entirely ignores the safe harbor for projections inserted into the PSLRA. Under the Act, there will not be liablility for inaccurate projections where the statement is:

• identified as a forward-looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement, . . . or . . . the plaintiff fail to prove that the forward-looking statement . . . [if made on behalf of a business entity by or with the approval of an executive officer was] made . . . with actual knowledge by that officer that the statement was false or misleading.

15 USC 78u-5(c)(1).  In other words, the provision codifies the traditional approach by insulating the  disclosure of projections from liability (unless made with "actual knowledge" that they were false) so long as they are accompanied by meaningful cautionary language.

The brief raises some interesting issues involving the interpretation of the federal securities laws.  But this argument takes away from the entire credibility of the brief.

The brief is posted on the DU Corporate Governance web site.

Joe Nacchio has filed a cert petition with the US Supreme Court.  In it, he raises three issues.  These include:

• 1. Whether the defendant is entitled to acquittal or a new trial because the Tenth Circuit, in conflict with the standards applied in other circuits, erred by upholding the jury instructions bearing on the materiality of the type of information at issue, and by holding that there was sufficient evidence that the defendant failed to disclose material information and knew it.

• 2. Whether the judgment must be reversed and remanded for a new trial because the Tenth Circuit approved the use of impermissible procedures for the exclusion of expert testimony under Rule 702 that conflict with decisions of other circuits.

• 3. Whether the Tenth Circuit’s decision should be summarily reversed because it misapplied decisions of this Court, mischaracterized the district court’s reasoning, failed to resolve all the issues presented, and held that Nacchio failed to address an issue that was a principal focus of his brief.

We will take a look at this petition, mostly by examining the first issue.  The other two have been examined in great detail in earlier posts in connection with the various 10th Circuit decisions.

We at this Blog are no experts on cert petitions and Maureen Mahoney is.  Nonetheless, we question some of the strategy.  The brief in a number of places makes dramatic predictions.  If the 10th Circuit decision is upheld, officers and directors will never be able to trade.  That Nacchio (or Qwest) would have been liable had they disclosed the internal data suggesting that the external forecasts were wrong. 

Both of these positions border on sophistry.  While there are technical arguments for the positions, it is hard to believe that many trained securities lawyers would agree with either.  They seem designed to promote a sense of Armageddon in an effort to attract attention to the brief and encourage the Court to take the case.  Fair enough.  But such positions also detract from credibility.  Having said that, Mahoney's strategy has caught us flat footed before (her one sentence in the appellate brief asking for a new judge, for example).  Perhaps it will happen again.  On with the posts.   

The cert petition, like all important documents in this case, is posted on the DU Corporate Governance web site.

Joe Nacchio lost his appeal, with the en banc court ruling against him by a 5-4 vote.  He is doing his best to stay out of prison pending appeal to the Supreme Court, so far to no avail.  He has been instructed by the federal district court to go to prison, with the arrival date scheduled for March 23.  An attempt to get the Court of Appeals to allow him to remain free pending appeal just failed.  There are still a few avenues open but it is looking increasingly like the March 23 date will remain firm.

Judge Henry wrote a separate dissent and suggested that the case would be back, with the courts having to resolve whether Nacchio received ineffective assistance of counsel.  As he noted:

• And, though I fear for today’s result, I do not believe this case is over. If “the district judge made clear his need for some proffer of data or literature underlying the expert’s assumptions and conclusions, [and] the defense offered practically nothing, despite repeated opportunities to do so,” Maj. Op. at 35, (citing United States v. Brien, 59 F.3d 274, 277 (1st Cir. 1995)), then defense counsel behaved inexplicably, which is to say they performed below the level expected of competent counsel. That means we will most likely see these issues return in the form of a § 2255 claim for ineffective assistance of counsel. The fact that a possibly meritorious § 2255 claim is waiting has no direct effect on what we do here now. Nonetheless, the majority’s scenario, which depends on a holding that counsel’s ineffectiveness possibly rose to a level of constitutional infirmity, suggests to me an alternative explanation: the district court simply was not clear, and it abused its discretion in excluding Mr. Nacchio’s expert.

Whatever the merits of the idea, Judge Henry predicates his views on the belief that counsel for Nacchio "behaved inexplicably" and, potentially, below the level of competent counsel. 

This is a hard argument to swallow.  Put aside that Nacchio received talented and skilled representation by five lawyers who seemed prepared at every turn.  There is also the possibility that the failure to submit additional information on methodology or request a hearing was actually beneficial to the defendant.  Had these things been done, its possible the evidence would still have been excluded, only this time on a more complete record that would have been harder to reverse. 

The actions of counsel at trial came within one vote of a new trial.  This hardly smacks of ineffective assistance.

The primary materials on this case have been posted at the DU Corporate Governance web site.

For a time, it seemed as if economic analysis (often bad economic analysis) was the sin qua non of legal analysis in the corporate law area.  There were plenty of scholars who wanted to see corporate and securities law become entirely a matter of contract.  The best way to police inefficient management was not by strengthening shareholder rights but by allowing the market for corporate control to exact the appropriate punishment.  In other words, let the market resolve everything. 

Those days have come and gone.  Certainly, the idea that the market can be counted on to correctly regulate behavior had taken a beating in the current economic turmoil.  Some degree of economic analysis can be useful depending upon the circumstances but it is but one more source of analysis, and sometimes a meager one at that.

In this particular case, Judge Holmes held that the reputation of Daniel Fischel, a preeminent scholar in the law and economics movement, and his track record of testifying in other cases was not of itself sufficient to establish his methodology.  In other words, it was not enough to repeat the mantra of economic analysis and present someone experienced and well known.  In effect, Judge Holmes held that economic analysis would receive no particular deference and, instead, had to meet the same standards that all other experts had to meet.      

Judge McConnell took great umbrage at the exclusion of Daniel Fischel and the perceived slight to the law and economics movement.  As he stated:

• Even more so, the judge must have been influenced by his conclusion that, quite apart from methodology, the evidence excluded was irrelevant and would be confusing to the jury. In his explanation of his disqualification ruling, Judge Nottingham articulated a contempt for expert economic evidence that raises serious questions about any exercise of his discretion in this matter. He described Professor Fischel’s proposed testimony—without knowing anything more about it than was described in the cursory “written summary” required under Rule 16—as “a waste of time” that would “mislead the jury” by “inviting the jurors to abandon their own common sense and common experience and succumb to this expert’s credentials.” Id. at 3919, 3920. He said, among other things, that the jurors had no need of expert evidence in determining whether Mr. Nacchio had an “economic incentive to trade or not trade on inside information here,” App. 3917; that analysis of the defendant’s trading patterns was “essentially irrelevant,” id.; that economic analysis “is within the common knowledge of the jury,” id. at 3918; that an analysis of whether Mr. Nacchio’s sales could be explained on the basis of the “economics of diversification” is “a piece of elucidation we really don’t need here,” id.; and that a comparison of Mr. Nacchio’s trades to those of other CEOs or Qwest directors at the same time, who lacked Mr. Nacchio’s inside information, is “almost preposterous.” Id. at 3919. He opined that expert evidence is no more necessary in a complex securities matter than in “a simple negligence case.” Id. at 3841. These statements are in sharp conflict with the advisory committee note to Federal Rule of Evidence 702, which describes “the venerable practice of using expert testimony to educate the factfinder on general principles,” specifically mentioning as an example “how financial markets respond to corporate reports.”

Perhaps this is a final chapter in the era of excessive deference to economic analysis.  Perhaps it means that economic analysis will be treated like any other, admitted where it is supported by a reasonable methodology, not admitted where it does not.     

The primary materials on this case have been posted at the DU Corporate Governance web site.

The case was decided by a 5-4 vote.  Nonetheless, there was a tenth judge involved in the decision making process, Judge Nottingham, the trial judge.  There is little doubt that his presence was felt by the dissenting judges in the en banc decision. 

Throughout the trial, Judge Nottingham and Judge Stern (Stern, counsel for Nacchio had once served as a federal district court judge in New Jersey) engaged in a constant tug of war, with the one with the gavel invariably winnning.  In addition, Judge Nottingham had a run of unsavory publicity in the aftermath of the trial, ultimately resigning from the bench. 

All of this seemed to have an impact on the deliberations.  Judge Holmes speaking for the majority disclaimed any impact of the trial judge on the appeal.      

• Mr. Nacchio is attempting to recast an unremarkable district court evidentiary ruling as an invidious act of judicial hubris. But it will not work. At bottom, Mr. Nacchio’s argument is no more than a run-of-the-mill lament of unfair surprise. We have rejected similar claims when, as here, the record belies them. Some of it was overt.

The dissent had a harder time of it.  Some judges didn't go to any great length to hide their annoyance at Judge Nottingham. 

During oral argument, Judge Kelly expressed almost palpable anger at Judge Nottingham, describing his ruling on Fischel as "the most simplistic thing I've ever seen." He seemed to confirm this attitude with a demonstration of favoratism toward counsel for the defense at oral argument.  Moreover, in his dissent in the en banc opinion, he specifically referred to "the tone of this trial," an obvious reference to his attitude towards Judge Nottingham. 

Judge Henry in his dissent in the en banc case also had a few digs to make at Judge Nottingham, although they were at least a bit less personal. As he described:"Yet, the district court, seemingly driven by some internal time schedule, deprived Mr. Nacchio of his key expert witness, Professor Daniel Fischel."  Whatever he means by "timetable," its clear that he viewed the ruling as somehow motivated by something other than Judge Nottingham's view of the law and the adequacy of the defendant's submissions.

Finally, Judge McConnell wrote a 44 page dissent.  Rather than discuss the trial judge in neutral terms (Judge Holmes referred to the decision maker interchangeably as the trial judge or the district court),  Judge McConnell singled out Judge Nottingham by name, mentioning him 33 times, as if the reference to the specific individual would somehow strengthen his argument.  We haven't studied the opinions written by Judge McConnell in any great detail but suspect that it would be unusual for him to criticize a specific judge by name in an opinion to the extent done in his dissent in the Nacchio en banc.  The opinion, therefore, has a very personal feel, one judge chastising another by name.  It doesn't help that Judge McConnel used some occasionally harsh language in describing the rulings of Judge Nottingham ("In his explanation of his disqualification ruling, Judge Nottingham articulated a contempt for expert economic evidence that raises serious questions about any exercise of his discretion in this matter.").   

One does have to wonder whether the presence of a different trial judge would have changed a vote or two among the dissenters.     

The primary materials on this case have been posted at the DU Corporate Governance web site.

As we more or less predicted, the full court vacated the panel opinion which had overturned the verdict of Joe Nacchio and ordered a new trial.  The effect of the en banc opinion is to reinstate the conviction.  The majority opinion was written by Judge Holmes who also wrote the dissent in the panel opinion.  His opinion is a lengthy discussion showing that Nacchio had plenty of notice and opportunity to make a stronger case for the admission of Daniel Fischel, the excluded experts. 

Judge Holmes made it very clear that the case was not about the personality of the judge or his hubris in the courtroom.  As he noted:  

• Mr. Nacchio is attempting to recast an unremarkable district court evidentiary ruling as an invidious act of judicial hubris. But it will not work. At bottom, Mr. Nacchio’s argument is no more than a run-of-the-mill lament of unfair surprise. We have rejected similar claims when, as here, the record belies them.

Judge Holmes further noted that Nacchio had not sustained his burden on the methodology used by Fischel.  While Fischel could rely on his "experience," the defendant needed to offer something more than simply taking the expert's word for it.    

• Mr. Nacchio considered his revised Rule 16 disclosure to be a submission on Professor Fischel’s methodology. Aplee. Supp. En Banc App. 50. This filing indicated that Professor Fischel was basing his opinion on analysis of, inter alia, market- and stock-related information. These assertions indicate that Professor Fischel was applying his experience to material that he reviewed to formulate an opinion. An expert witness’s testimony can rely solely on experience. When that is the case, however, “the witness must explain how that experience leads to the conclusion

  reached, why that experience is a sufficient basis for the opinion, and how that experience is reliably applied to the facts.” Fed. R. Evid. 702 advisory committee’s note (2000). Mr. Nacchio did not offer any of this additional information. “The trial court’s gatekeeping function requires more than simply ‘taking the expert’s word for it.’” Id. “[N]othing in either Daubert or the Federal Rules of Evidence requires a district court to admit opinion evidence that is connected to existing data only by the ipse dixit of the expert.” Joiner, 522 U.S.  at 146.

Although conceding that Fischel had testified in the past, the expert's past experience and general expertise was not a substitute for a description of the proposed methodology.

• It appears that Mr. Nacchio relied on Professor Fischel’s qualifications to tip the balance in favor of the admissibility of his expert testimony.  In doing so, Mr. Nacchio ignored the precept that when assessing expert testimony, “the question before the trial court [i]s specific, not general.” Kumho Tire, 526 U.S. at 156. Although Professor Fischel generally has been permitted to testify in the past, and a district court might well respect his credentials, the court had an obligation to assess the methodology that Professor Fischel had employed in the case at hand. See id. at 153-56; Rodriguez-Felix, 450 F.3d at 1122. Mr. Nacchio could not assume that his expert’s testimony would be admitted because other courts had allowed it in; he had to carry his burden of demonstrating the admissibility of Professor Fischel’s testimony in this particular case. Mr. Nacchio, however, failed to satisfy the district court that Professor Fischel’s testimony was reliable. Thus, the district court was well within its discretion in excluding it. See Rodriguez-Felix, 450 F.3d at 1125 (finding no abuse of discretion when the district court excluded testimony based on the “woefully inadequate” report regarding proffered testimony).

The opinion ended by sending the case back to the panel to address some remaining unresolved issues, including those centering around sentence enhancement and asset forfeiture.  These are relatively modest issues that do not go to the underlying merits or the need for a new trial.  For Nacchio to have any meaningful hope of reversal, he will have to go up the ladder with the decision.  

The primary materials on this case have been posted at the DU Corporate Governance web site.

As an initial matter, we offer the following comments from John Holcomb at the Daniels College of Business.  John has commented considerably on this case and attended the trial. 

• As several predicted, the en banc panel has reversed the 3-judge panel and reinstated the Federal District Court ruling and verdict. In that sense, it is a red-letter day for criminal justice and vindication for Qwest shareholders and retirees, as well as vindication for Judge Nottingham in his careful rulings on the exclusion of Fischel as an expert witness.

• Though it is a narrow 5-4 ruling, the majority decision is a thorough rebuke of the claims made by the defense and the analysis of the three-judge panel. It even adopts some of Judge Nottingham’s language that the defense report to qualify Fischel as an expert witness was “woefully inadequate” or “woefully insufficient.” It is clear from the majority opinion that any mistakes made were by defense counsel and not by Judge Nottingham.

• The en banc opinion deferred to Judge Nottingham’s discretion and the procedures used in excluding the expert testimony and ruled that he had not been arbitrary or capricious, but rather careful in his rulings. The defense had received plenty of notice that Nottingham would rule on the government’s crucial motion that the expert testimony be excluded as not meeting Daubert standards, and the defense had numerous opportunities to request an evidentiary hearing and failed to do so.

• The court has remanded to the 3-judge panel for a decision on sentence enhancement and forfeiture issues, where Nottingham was again careful and restrained in his rulings. Hence, any reversal or modification of the sentence is highly doubtful.

• In his dissent, Chief Judge Henry suggests the case is not over, and if the majority is correct about the mistakes made by defense counsel that Nacchio might file an appeal based on “ineffective assistance of counsel.” That likely will not fly, in spite of the numerous criticisms of counsel Stern’s advocacy. In the slight chance it would fly, it would be quite a blemish on Stern’s reputation.

• This is a great ruling and a very careful and convincing majority opinion by Judge Holmes, who dissented from the 3-judge panel decision. He carefully weaves through every precedent, showing how they dictate the result in this case and how any contrary rulings do not apply and can be readily distinguished. His footnotes are well crafted and provide tremendous support for his analysis. Given his earlier dissent from the three-judge panel and his majority opinion for the en banc court, he will be the hero to Qwest shareholders and to those who will be glad to see Nacchio in prison.

The 10th Circuit has affirmed the conviction of Joe Nacchio by a 5-4 vote.  We will have commentary on the case later.

So, what impact will Judge Nottingham's resignation have on the Nacchio appeal?  Following oral argument before the en banc court, the tradition is for the judges to take a tentative vote on the outcome.  The case has, therefore, probably been decided, with the delay coming from the need to draft an opinion (and the inevitable dissent).  The opinion of the majority must then be circulated to the judges of the court and they will either sign off on it or seek to negotiate changes in the language.  There is, therefore, time to change one's mind or insist on changes to the majority opinion.

This process could be impacted by the resignation of Judge Nottingham in two ways.  First, it was quite clear at the oral argument before the original panel (Judges McConnell, Kelly and Holmes) that Judge Kelly was palpably angry at Judge Nottingham, at one point describing a ruling by the trial judge as simplistic.  This took place at the time Judge Nottingham was receiving some horrible publicity with respect to expenditures at a strip club.  In other words, there is at least some indication that outside publicity impacted the views of those deciding the case on appeal.  The same thing could happen here with the lastest round of bad publicity for Judge Nottingham. 

Second, to the extent that the court votes to send the case back to the trial court for additional hearings, it was unclear whether the case would go back to Judge Nottingham.  The panel opinion specifically ordered that a new judge handle any retrial.  But if the case went back to a trial judge for motions, it would have been very inefficient to change the judge.  Now if the court orders remand, it will be burdening another trial judge with the obligation to come up to speed on a long running case, an inefficient decision to say the least.  With Judge Nottingham gone, there is no longer any choice.  It must go back to another judge.  This makes it at least slightly less likely that the en banc court will reach a result that requires additional motions hearings.  

Having said all of that, the current trials and tribulations of Judge Nottingham will probably not impact a decision that was likely reached back in September.