Redacted Transcripts of Closed Nacchio CIPA Hearings to be Released October 3, 2007

On August, 17 2007 the Denver Post (Post) filed a motion in the U.S District Court for the District of Colorado seeking the release of redacted transcripts of seven closed CIPA hearings held in the Joseph Nacchio insider trading trial. The Post argued that the public was entitled to any “transcripts of judicial hearings conducted in connection to criminal cases.” The Denver Post, Request of the Denver Post for Release of Redacted Transcripts of Closed CIPA Hearings, August 17, 2007. Further, and perhaps more importantly, the release of the transcripts needed to be made in a timely fashion, stating the law calls for “contemporaneous” release of the transcripts and arguing that hearings occurred mid-2006 and the transcripts had yet to be released. Id.

The Government refused to concede any of the legal arguments "raised by the Denver Post in their motion nor whether their motion is proper” but did agree to make the redacted transcripts available October 3, 2007. The Government needed the delay to review the transcripts stating that counsel from the agencies responsible for the classified information in the case had been reviewing the transcripts.   The Government did not name these "agencies" responsible for CIPA issues.  United States Response to Request of the Denver Post for Release of Redacted Transcripts of Closed CIPA Hearings, September 19, 2007.

As for the position taken by Mr. Nacchio, he declined to take any position on the release of the CIPA transcripts with the classified information redacted. Nacchio, Response by Mr. Nacchio to Request by the Denver Post for Release of Redacted Transcripts of Closed CIPA Hearings, September 19,2007.

All three documents; The Denver Post Motion, and both Mr. Nacchio’s and the Governments Responses can be found that the DU Corporate Governance Website.

Nacchio Court Rules On The Defenses Jury Questionnaire Request

On May 22, 2007 Judge Nottingham issued his order ultimately allowing the defense access to the questionnaires used by the court to begin the jury selection process. This order was in response to a motion on the part of the Nacchio defense team in what was the initial post trial posturing by following Mr. Nacchio’s conviction for insider trading earlier this year.

The defense argued that under the Jury Selection and Service Act of 1968, 28 U.S.C. § 1867 (the Act), Mr. Nacchio was entitled to the questionnaires. The Nacchio defense team wanted to search for possible error in the way the Court “winnowed down” the 1000 member jury pool to a total 78 prospective jurors. The defense claimed that the questionnaires could provide not only information that would show some members of the 1000 member pool’s answers to the questions did not demonstrate “bias justifying automatic excusal” but also provide some insight into how the court chose the jury pool.

Judge Nottingham began his analysis by pointing to the two unusual challenges the Court faced in seating a jury; that of the “unusual length of the trial,” and “pre-trial publicity,” a lot of which the court stated was “unfavorable to the defendant.” The Court said it utilized the questionnaires as a way to address these two issues by eliminating those jurors “who had a present or past relationship to Qwest or who would claim undue hardship when informed in open court of the length of the trial.” Moreover, the Order stated, the defense was completely aware of the methodology of the Court in developing the questionnaires and its purposes, as the defense participated in the process in hearings that spanned several months in late 2006 and early 2007. Though ultimately the Court allowed the defense access to the questionnaires, it did so at its discretion and with some stipulations.

Both motions by the Mr. Nacchio, the response by the Government and the order of the Court can be found at the DU Corporate Governance website.

Judge Nottingham Stays $19M Fine

Trial court Judge Edward Nottingham granted former Qwest CEO Joe Nacchio’s unopposed motion to stay the fine that was part of Nacchio’s sentence. Judge Nottingham imposed the $19,000,000 fine during the sentencing hearing held on July 27. As a condition of the stay, Judge Nottingham required that Nacchio deposit $19,000,000 into the registry of the U.S. District Court for the District of Colorado. The money is to be held in an interest-bearing account. The stay is permitted under Federal Rule of Criminal Procedure 38(c):

(c) Fine If the defendant appeals, the district court…may stay a sentence to pay a fine or a fine and costs. The court may stay the sentence on any terms considered appropriate and may require the defendant to: (1) deposit all or part of the fine and costs into the district court's registry pending appeal.

Both Nacchio’s motion to stay the fine and the order granting the stay can be found on the DU Corporate Governance Website.

The Trial of Joe Nacchio and the Panel that May Hear the Case

The Tenth Circuit yesterday granted Joe Nacchio's motion for bail pending appeal.  We have written a post on the order, focusing on whether the same judges who granted the motion are likely to hear the appear on the merits.  The post is here. 

Nacchio, Bail Pending Appeal, and the Random Assignment of Cases at the Court of Appeals

Yesterday, a three judge panel at the US Court of Appeals for the 10th Circuit granted Joe Nacchio, the former CEO of Qwest Communications, bail pending appeal.  The order is posted on the DU Corporate Governance web site.  Nacchio was convicted of 19 counts of insider trading and sentenced to six year in prison.  The short two page order invoked 18 USC 3143(b) which essentially requires, as a recondition to bail pending appeal, the raising of a "substantial question of law or fact" that is "likely to result" in, among other possibilities, reversal.  The order, therefore, sends a clear message that the three judges (Kelly, McConnell and Holmes) believe that there may have been reversible error committed in the case.  The order set down an expedited appeal schedule for the case, with oral argument scheduled for mid-December. 

The order got us thinking back about how cases are assigned to panels at the US Court of Appeals and whether these same three judges would hear the merit appeal.  It certainly would be important to both sides since this order at least indicates the three judges are leaning in Nacchio's direction.

The short answer is that it depends upon the circuit.  All of the circuits purport to assign cases to panels on a random basis, although only a few have a rule that actually requires this.  As the article, The Neutral Assignment of Judges at the Court of Appeals, makes clear, there is no guarantee that this is the case.  Most circuits do not have a fail safe system for ensuring random assignment of cases to panels, with some circuits worse than others.  The 10th Circuit has the best system because the method of assigning is done entirely by computer and an audit trail is kept for any subsequent changes in panel composition.  For additional information on circuit practices, at least as of the late 1990s, go here.

With respect to merit appeals, most circuits assign these cases randomly.  Some, however, have a rule that if there has been substantial prior involvement in the case prior to the merit appeal, an effort will be made to assign the case to the same judges.  This is true, for example, in the Fourth Circuit.  See, e.g. Internal Operating Procedure  34.1, US Court of Appeals, 4th Circuit ("Every effort is made to assign cases for oral argument to judges who have had previous involvement in the case on appeal through random assignment to a preargument motion or prior appeal in the matter,").  In those circuits, therefore, a panel of judges having prior involvement in a case could end up hearing the merit appeal.  If this were true, it would be possible to see the judges deciding Nacchio's bail motion also deciding his merit appeal.  

The Tenth Circuit, however, does not have such a rule.  Ordinarily, this would mean that the case would be assigned randomly and the judges deciding the bail motion would probably not also hear the merit appeal.  The posture of this case, however, is a bit unusual.  Because the panel set oral argument for December, it will have to be heard outside the regular term of the 10th Circuit.  In other words, it will require a special session and the creation of a panel specifically for this case (although it may well hear others at the same time). 

Even in these circumstances, however, the Tenth Circuit is likely to form the panel through random assignment, without consideration of the earlier motions with respect to bail pending appeal.  Thus, while there are three judges on the Tenth Circuit who see some merit to the Nacchio appeal, they will not likely decide the case on the merits.   

Judge Nottingham's Sentencing Error a Harmless One

After Judge Nottingham had denied the two downward departure requests from Nacchio (extraordinary family situation and extraordinary charitable works), I assumed Judge Nottingham would follow the government's perspective (including my own in an earlier blog post) that the proper prison term range was 70 to 87 months under the federal sentencing guidelines. The government argued vigorously that the high range or 7 years was appropriate and Judge Nottingham made it clear he wanted to send a message to CEOs that the cost associated with violating the rule of law would be high. However, Judge Nottingham did mention that he would take into account Nacchio's strong history in providing for his family and his strong bond with his son when determining the length of Nacchio's sentence. Consequently, I was expecting a sentence between 6 and 7 years.

While Judge Nottingham ruled that the just sentence for Joe Nacchio would be 72 months or 6 years, it was his legal analysis that surprised me since it involved a clear error according to the Mooney case in the 8th Circuit that he said he was following to ignore Nacchio's approach (1.8 million of gain due to the material nonpublic information). The judge ruled that the majority opinion in Mooney was correct to determine the "“the total increase in value realized through” his illegal stock sales by income tax withholdings." In Mooney, the 8th Circuit specifically noted that the proper approach is to take the gross sales price less the cost of the stock to determine the applicable "increase in value realized." The Mooney majority pointed out that this approach is the same as Section 1001 of the Internal Revenue Code.

However and unexpectedly, the judge specifically deviated from Mooney and further reduced (approximate numbers) the $44,000,000 (gain realized= $52,000,000 less 8,000,000 in stock option costs) by the $16,000,000 in income taxes withheld by Qwest to arrive at a gain realized by Nacchio of $28,000,000. This approach by the judge thus resulted in an aggravation increase of 16 levels instead of the 17 levels according to the gain chart below from the Sentencing Guidelines (Section 2F1.1):

(Q)	More than $20,000,000	add 16
(R)	More than $40,000,000	add 17

 
Thus with one less level in the calculation, Judge Nottingham determined that the range should be 63 to 78 months.

The government's "Sentencing Statement" (which I concur) provides the following legal analysis on this point that the 17 agravation levels should be used because the $44,000,000 gain was the appropriate "value realized":

Remarkably, the defendant also claims that the calculation of his gain from his illegal stock sales should be reduced by the amount of income taxes withheld. The defendant cites no authority to support this novel position. The defendant is not entitled to offset “the total increase in value realized through” his illegal stock sales by income tax withholdings. U.S.S.G. § 2F1.2, cmt. background. Of course, the amount of estimated income tax that Qwest withheld on the defendant’s illegal proceeds is not the same as what tax he actually paid when he filed his tax returns for 2001.

In evaluating the seriousness of the offense, it would be improper to reduce the defendant’s gain by income tax he paid on the gain. Doing so could skew the calculation based upon income tax factors that have nothing to do with the offense – such as the type of income, the defendant’s tax bracket, his state of residence, his charitable giving, his number of dependents, his other income, and economic losses in the year, and so on. It would introduce needless confusion from irrelevant issues – confusion that was clearly not intended by the Sentencing Commission. “[A] deduction for taxes could create unwarranted complexities . . . . The amount of taxes that a person pays depends upon the nature of deductions taken by the taxpayer.” United States v. DeFries , 129 F.3d 1293, 1314 (D.C. Cir. 1997) (in the context of criminal forfeiture).

Finally, the Commentary to §2F1.2 states that gain is “the total increase in value realized through trading in securities by the defendant.” U.S.S.G. § 2F1.2, cmt. background (2000) (emphasis added). Inclusion of the word “total” indicates that the Sentencing Commission intended use of the gross amount rather than allowing deductions for expenses or income taxes resulting from the gain.

The judge acknowledged that the lower range might be controversial by pointing out that the 6 year sentence (or 72 months) fell within the range requested by the government as well:

Government range:      70 to 87 months  (72 months in the low portion
                                                               of the range)
Judge Nottingham's:    63 to 78 months  (72 months over the middle
                                                               of the range)

Perhaps the judge used the lower range to show leniency to Nacchio and thus deflect perhaps an accusation that he "threw the book" at Nacchio creating an overly harsh sentence since he already sentenced Nacchio to the maximum fines and forfeiture.  This lower range avoided as well the appearance that he was too lenient if he applied the higher range under the Federal Sentencing Guidelines.  While I believe Judge Nottingham's decision incorrectly applied the Guidelines under the Mooney decision, his error was harmless since his decision fell within the government's correctly calculated range.  After all, Judge Nottingham stated that he believed that a judge's sentencing decision was not reviewable if it fell within the range under the Federal Sentencing Guidelines.

Comments on Nacchio Sentencing Hearing of July 27, 2007

We are privileged to have the comments of John Holcomb, Professor, Daniels School of Business, University of Denver on the sentencing of Joe Nacchio.  John attended the sentencing hearing on Friday.  

Overview Comments

While the prosecution team starred earlier in the Nacchio trial, the sentencing hearing was clearly Judge Edward Nottingham’s day to shine. Judge Nottingham displayed a combination of compassion and firmness in meting out the sentence of six years in prison to Joseph Nacchio, along with a fine of $19 million and forfeiture of $52 million. In addressing the importance of Nacchio to the health of his son David, he praised Nacchio as having an unblemished record prior to the insider trading case and as having been a wonderful father. At the same time, he ruled that factor did not warrant a departure from the sentencing guidelines into a lower range and denied that motion. Nottingham commented on Nacchio’s “overarching greed” a number of times, saying it led Nacchio to make a large amount of money by working in Denver at least four days a week rather than staying near the troubled son who allegedly relied on him for care and support. The judge pointed out that Nacchio had not walked away from Qwest in January, 2000, after his son had attempted suicide, but rather negotiated a contract extension at a higher salary with more stock options. The prosecution had earlier pointed to this same event in its dramatic closing argument.

The judge found a pattern of “overarching greed” in Nacchio’s crimes and found that his character reflected two aspects. On one hand, Nacchio’s life has been the classic Horatio Alger story and rise of an immigrant, that of an aggressive, tough, and demanding executive. On the other hand, “due to a character flaw or greed, tragically he catapulted over the top.”

Judge Nottingham was also eloquent in explaining and justifying the sentence, that the sentence must promote respect for the rule of law. In a “republic planted thick with laws,” the judge said to Nacchio that “the law has protected you, and the law cannot stand if it is not enforced evenly.” Judge Nottingham said there must be equal justice between rich and poor, and “the law does not care if you are wealthy.”

The judge also issued a balanced and measured sentence that is likely to withstand appeal because it was so carefully reasoned and justified. While it did not abide by the prosecution’s request for a stiffer sentence in excess of seven years, it did fall into the upper half of the appropriate range of the sentencing guidelines, as Judge Nottingham explained that range. The judge calculated a point total of 26 for Nacchio’s offenses under the guidelines, which would lead to a sentence of 63 to 78 months in prison, and the judge sentenced Nacchio to 72 months, or six years. The total of 26 points is comprised of eight base points, 16 points due to the economic gain of Nacchio, and two additional points for the breach of trust involved.

Due to Nacchio’s “overarching greed” and because he had “set the culture” or “condoned the culture” at Qwest to encourage insider trading, Judge Nottingham believed a sentence of six years to be fair. The issue of corporate culture is an extremely important one. While the prosecution had not stressed it that much during the testimony and closing arguments, Judge Nottingham rightfully emphasized it when imposing sentence. Much of the discussion and analysis of corporate governance, of the sentencing guidelines, and of the Sarbanes-Oxley Act highlight the importance of the “tone at the top” in creating corporate culture. Hence, it is fitting that Judge Nottingham would cite it as a factor in determining the sentence.

Rulings on Motions

Prior to issuing his sentence and prior to the arguments on sentencing by the defense and the prosecution, Judge Nottingham ruled on several motions from the defense. He first summarily denied a motion for acquittal. Next, he denied a motion for change of venue and defended the jury selection process. He pointed out that the court had eliminated large blocks of potential jurors who might have been biased and any with an affiliation with Qwest and wound up with an extraordinary jury. The judge maintained that any publicity adverse to the defense or any alleged circus atmosphere did not affect the jury deliberation. He said the verdict was not the product of any bias or anger toward Mr. Nacchio and that the jury deliberated for days before producing a mixed verdict.

Judge Nottingham also denied a motion to admit Dr. Hammer’s oral testimony regarding the importance of Nacchio’s availability to his son David, arguing for a lower prison sentence. The judge said that he had read the doctor’s report, that it was quite detailed, and that there was no need to further explore this private matter in open court. He further said that the logic of the defense position based on the report is that Nacchio should not be imprisoned at all, but that probation is out of the question, based both on the statute and circumstances involved in the case. Judge Nottingham concluded that the argument that Nacchio is the “lifeline” for his son falls on its own weight. He added there was no justification for in camera proceedings with the doctor and that any ex parte conversation between the court and the doctor would certainly prompt an objection from the prosecution.

Economic Gain

The issue of Nacchio’s economic gain from his insider trading was an important factor in determining the sentencing range. Usually, economic loss and harm to victims is used to determine the seriousness of the offense, and a “reasonable estimate” of the loss is appropriate, since this wasn’t a civil case and wasn’t about math, according to Judge Nottingham. However, it was difficult or impossible to calculate loss in this case, so economic gain for Mr. Nacchio was used instead, and courts have usually found that the economic gain in such a case underestimates the amount of loss to the victims.

The amount of economic gain is based on the total increase in value for the defendant realized at the time through trading, and not just the value accrued through the alleged use of inside information. The judge found that the defense method of determining the amount of the gain was flawed and that the defense had relied on civil insider trading cases as its authority rather than criminal cases. Further, those cases were based on calculation of loss rather than gain. Further, Judge Nottingham concluded that the defense ignored the actual statute and nature of harm in this case. Citing two of the leading insider trading cases (U.S. v. Chiarella and U.S. v. O’Hagan), the judge said that Nacchio owed a duty to either disclose the nonpublic information he possessed or to refrain from trading. Since he failed to disclose, he should have refrained from trading.

In arguing against the court’s determination of economic gain, the defense rehashed some of its trial arguments, contending that Nacchio really didn’t want to sell his shares but had asked the board to extend the life of his options, and that he had sold only a fraction of what he owned. The prosecution countered, as it had earlier in its closing, that Nacchio did not have to sell his shares, that he sold at the first opportunity and received more options when he renegotiated his contract, and that he would have committed more crimes had he sold even more shares.

Fine and Forfeiture

In imposing a fine of $19 million and a forfeiture of $52 million, Judge Nottingham looked to more than justice for shareholders. He included other factors, such as reimbursing the cost to the government for Nacchio’s prosecution and incarceration, as well as deterrence and demonstrating that crime doesn’t pay. The judge maintained that serving deterrence would justify the maximum penalty and would impose no undue financial burden on the family. In addition to the fine and forfeiture, Nottingham also ordered a minimum term of two years of supervised release after Nacchio serves his prison term.

Charitable Activities

The defense argued that the judge should depart from the guidelines and order a lower sentence on two grounds – to recognize Nacchio’s charitable activities and to care for his son. Nottingham rejected each argument. He agreed with the prosecution that Nacchio’s community and charitable activities were more expected of a person of Nacchio’s profile and “hardly extraordinary,” as required under the sentencing statute. Judge Nottingham added that Nacchio’s private acts and the reliance of the extended family on “Uncle Joe” were commendable but not extraordinary, and added that some white collar perpetrators seem to have two personalities. While Nacchio’s charitable and private acts did not warrant a departure from the guidelines, the judge acknowledged that they did affect where within the sentencing range the sentence would be imposed.

The judge and the prosecution both observed during the hearing that Nacchio’s charitable contributions were quite ordinary for a person of his income, constituting only 0.8 to 1.9% of his income, and were certainly not extraordinary. Beyond that, his service on a presidential commission was expected of the twenty CEOs of telecomm companies who served. Neither the judge nor the prosecution noted the criticisms of Qwest’s paltry community involvement under Nacchio’s leadership. After acquiring U.S. West, a leader in corporate contributions and community involvement throughout its history, Qwest cut way back on its philanthropy and involvement in order to cut costs, to the great displeasure of the Denver nonprofit world.

Support for Son

As earlier noted, Judge Nottingham also rejected the defense argument that he should move to a lower sentencing range in order to accommodate Nacchio’s need to support his son through his medical problems. He said there were “other ways of dealing with the situation,” including the grant of a furlough through the prison system in extraordinary circumstances. In demonstrating some compassion, Nottingham observed that the son’s reliance on Nacchio justified an adjustment of the sentence within the range but did not justify a departure from the guidelines.

The prosecution had also argued that other family members provided a “vibrant, robust” support system for son David and that no case law justified a downward adjustment in the sentence in this situation. While the defense argued it was important that Nacchio “be available” to his son and that he had actually lived with his son for four months while the son had been a student at the University of Pennsylvania, prosecutor Colleen Conry observed that Nacchio’s full-time employment demonstrated he was not that involved in his son’s care.

Release Pending Appeal

Judge Nottingham rejected the defense motion for release pending appeal, requiring Nacchio to surrender himself within fifteen days of being summoned by the prison. In order to win the motion, the defense had to demonstrate a likelihood of reversal of the trial court on appeal. Not surprisingly, they were not able to demonstrate that to Judge Nottingham. Lead defense counsel Herbert Stern spent the waning moments of the sentencing hearing making his arguments on the release issue and suggesting reasons why the court might be reversed, including the refusal to call a defense expert witness.

Judge Nottingham ended the proceedings by carefully explaining why he saw no likelihood of reversal on appeal, while leaving open the possibility of a surprise. He said the defense would have to show a “substantial question or close question” that could be decided the other way, and they had failed to do so. As for his refusal to depart from the sentencing guidelines in favor of the defense, Judge Nottingham noted that the Tenth Circuit in the past has seen that issue as not reviewable.

The judge then methodically reviewed each of the issues argued by the defense, starting with its criticisms of the jury instructions. Judge Nottingham pointed out that the cases cited by the defense on the materiality instruction do not apply in criminal insider trading cases and that Nacchio’s recitation of earnings projections certainly were material. The judge also defended his jury instructions on the meaning of “nonpublic information” and on the meaning of “good faith.”

As for his exclusion of the defense expert witness, Judge Nottingham maintained that the witness would only testify on matters of common knowledge and should have been excluded on other grounds as well. He had also allowed the witness to testify as a “summary witness,” to summarize his data analysis, without being able to offer any expert opinion. The judge also summarily rejected the claim that there was insufficient evidence for the verdict.

As to the claim that the judge had improperly rejected the “classified information” defense, that Nacchio alone knew of great prospects for Qwest based on classified data, Nottingham addressed both of the defense arguments. He said he found no basis for the argument that his ruling had violated the confrontation clause and that he had not denied compulsory process to the defense, that they could talk with whomever they wanted.

Judge Nottingham then adjourned the sentencing hearing after denying the motion for release pending appeal.

Prosecution and Defense Strategy

As in the closing arguments, the prosecution once again divided the labor efficiently between Colleen Conry and Cliff Stricklin, with Conry arguing against a downward departure from the sentencing guidelines due to Nacchio’s charitable activities and support for his son. Following that, Stricklin argued for the imposition of a sentence at the high end of the guidelines range, because it was justified and in order to send a strong message to corporate executives.

As in the defense closing arguments, Herbert Stern once again argued all the issues from the defense side at the sentencing hearing. Judge Nottingham had provided an opportunity during the proceedings for Joseph Nacchio to address the court, but he declined at that point. Near the end of the hearing, Nacchio then requested to address the court, but Nottingham said that he had been provided an earlier opportunity and that it was then too late. Nacchio had earlier bristled at references to his “overarching greed,” and was likely frustrated by his inability to address that motivation. He curtly rejected that motivation in answer to a reporter’s question after the hearing. Perhaps his confusion over whether and when he might address the court was but another reflection of disorganization among the defense team and in it strategy.

The Sentencing Hearing: Joe Nacchio Wants to Speak

There were a number of interesting moments at the sentencing hearing yesterday. One of the more interesting concerned Joe Nacchio's efforts to address Judge Nottingham. Before Judge Nottingham issued the sentence, Nacchio was invited to speak. The court took a brief break and upon return, his lawyer, Herbert Stern, indicated that Nacchio would not take advantage of the opportunity. The hearing proceeded and the Judge issued the sentence.  Towards the end of the morning, he addressed the issue of bail pending appeal.  He went through the reasons why bail would be denied and Nacchio would be required to report to prison, essentially within 15 days. 

It is probably the case that Joe Nacchio thought he would leave the court room free until the appeal was resolved, something that would likely take 18 to 24 months, so the announcement no doubt came as a shock.  As the judge ended the hearing, Nacchio unexpectedly rose from his seat and began to address the judge directly.  Judge Nottingham reminded him that “I’m required by rule to give you an opportunity to do that before sentence is imposed" and that he had done that.  Nacchio continued to try to address the judge.  Judge Nottingham turned to Stern and asked him if he wanted to speak to his client.  Stern counseled Nacchio and no further efforts were made to speak with the Judge. 

The Sentencing of Joe Nacchio

We have put on the main page a number of posts about the sentencing hearing of Joe Nacchio.  We will be posting on this over the weekend as well.

The Sentencing of Joe Nacchio

The Race to the Bottom attended the sentencing of Joe Nacchio.  Judge Nottingham ran a tight hearing, ultimately imposing a sentence of 72 months, $71 million in forfeiture and fines, and imposing two years of supervised release once the sentence is served.  Most dramatically, he denied the defense motion for bail pending appeal, giving Mr. Nacchio 15 days once the appropriate prison is designated to begin serving the sentence.  We start today with two posts on the hearing, one from Trevor Crow, a student working on the Blog, and another from Kevin O'Brien.   

An Overview of the Sentencing Hearing

Judge Nottingham issued his order sentencing Joseph Nacchio based on three components:

1) Fine

2) Imprisonment

3) Terms for Release

First, the Judge imposed a fine of $19M in addition to a forfeiture $52M based on Mr. Nacchio's gross proceeds from his stock sale.  Next, Mr. Nacchio was sentenced to 72 months (6 years) per count to be served concurrently.  Finally, he was given two years supervised release, the minimum according to the sentencing guidelines.  Mr. Nacchio's motion for bail pending appeal was denied and Judge Nottingham ordered Mr. Nacchio to voluntarily surrender within 15 days after the location of incarceration has been determined.

The day started with Judge Nottingham denying a series of outstanding motions, including the motion for acquittal and the motion for change in venue.  He also denied the government's motion to subpoena the medical records of Mr. Nacchio's son, David.    

Following the rulings, Defense attorney, Jeffrey Speiser began by addressing the issue of Mr. Nacchio's gain for the sale of stock, a factor in determining his sentence.  Mr. Speiser argued that the calculation of $44M of gain was incorrect and that the amount should have been based upon the value of the material nonpublic information that was realized in the transaction, an amount Nacchio argued on brief was approximately $1.8 million.  Judge Nottingham rejected this argument.  The Judge did find, however, that the amount Mr. Nacchio realized was $28M, the total amount of the sale of his stock minus taxes and transaction costs. 

Next, Defense attorney, Herbert Stern addressed the court arguing for a downward departure from the sentencing guidelines or in the alternative to sentence Mr. Nacchio at the low end of these guidelines.  In support of his argument, Mr. Stern contended that the court should consider Mr. Nacchio's charitable givings as well as his extraordinary family situation, particularly concerning his son, David Nacchio.  At the trial it was disclosed that David Nacchio had apparently attempted suicide. 

U.S. attorney, Colleen Conry, opposed Mr. Stern's charitable givings argument by reiterating a theme that Mr. Nacchio's philanthropic contributions were not "extraordinary but ordinary."  In fact, Ms. Conry suggested that Mr. Nacchio's charitable givings in light of his position and wealth were "paltry" at best.  Regarding Mr. Nacchio's family situation, Ms. Conry asserted that a downward departure would be an unprecedented action because David Nacchio is a 26 year old college graduate, living in an urban area, with other supportive family members.  

US Attorney Cliff Stricklin made the case that Mr. Nacchio should receive a sentence at the upper end of what the sentencing guidelines mandated.  He mainly argued that, on sliding scale of culpability, Mr. Nacchio was at one end of the spectrum.  He also indicated that this was an opportunity to send a message that others would hear.

In the end, Judge Nottingham found that the defense arguments did not justify a downward departure in the sentencing guidelines.

In denying Mr. Nacchio's motion for bail pending appeal, Judge Nottingham considered whether there was a substantial question that, on appeal, likely would result in a new trial.  Judge Nottingham reviewed the arguments the defense planned to make on appeal and determined that they were not close questions.  Judge Nottingham ordered Mr. Nacchio to voluntarily surrender within 15 days of the designation of the place of incarceration. 

Overview of the Sentencing Hearing

Judge Nottingham addressed a number of motions between the parties, heard legal arguments, and finally ruled on the sentence of Joe Nacchio. What follows is an overview of the sentencing hearing:

1. Nottingham ruled that Joe Nacchio's motion for a new trial based upon the failure to grant a change of venue was denied since any pretrial publicity or prejudice did not create a "circus atmosphere" in the courtroom or adversely affect the proceedings as required by case law for a change of venue. The jury, characterized by the judge as extraordinary, made its decision based upon a rational view of the evidence presented.

2. Nottingham ruled that the amount of forfeiture was approximately $52 million dollars representing the gross proceeds of the illegal stock sales. Case law within the 10th circuit required this result even though Nacchio's counsel had argued in a brief that it should be $1.8 million based upon the amount attributable to the value of the material nonpublic information determined by his expert witness.

3. Nottingham ruled that the maximum amount ($1,000,000) of the possible fine per count (19 counts of insider trading) should be the imposed. Using colorful language, the judge noted that Nacchio was responsible for creating a corporate culture at Qwest where greed and consequently, insider trading, became a common occurrence. The judge noted that he needs to send a message that not only does "crime not pay" but that it also costs. The maximum fine of 19 million was being imposed because it is needed to deter the greedy impulses that lead to felonious conduct by executives.

4. The judge heard a great deal of legal argument from both sides on the issue of the appropriate prison term. The following are the legal arguments related to the various components of the appropriate sentencing range under the Federal Sentencing guidelines:

a. Nacchio's counsel argued the imposition of an increase of two base levels for "abuse of trust" was "piling it on" while the government argued that Nacchio was more than a tippee, or an insider giving a tip. Rather, the government argued that Nacchio was the CEO who actively participated in setting the aggressiveness of the forward looking statements and whether they would be changed. Nacchio engaged in insider trading when he was in a position of trust as the CEO of Qwest. The judge ruled in favor of the government to increase the base levels for "an abuse of trust."

b. Nacchio's counsel argued that the aggravating factor of the insider trading sales was not properly calculated by the government. Nacchio argued that the proper calculation should be net of selling expenses and taxes withheld by Qwest in addition to the stock option costs (around 28,000,000 in net gain). Nacchio further argued that the amount of the gain due to the material nonpublic information (1.8 million according to his expert) should be followed based upon the minority opinion in the Mooney case. The judge followed the majority opinion of the Eighth Circuit case in Mooney to base the gain component on "realized gain." However, the judge deviated from the 8th Circuit when he calculated selling costs and withheld taxes to determine the "realized gain" and followed Nacchio's calculation of $28 million. This deviation resulted in a reduction of one base level from the 17 level increase sought by the government. The resulting 16 level increase resulted in a reduction of the overall sentencing range from 70 to 87 months to 63 to 78 months. However, the judge noted that he would ultimately rule where the prison sentence would be within both of these two ranges since they overlap..

c. Nacchio's counsel argued that the illness afflicting Nacchio's son was an extraordinary circumstance justifying probation or a significantly reduced sentence below the federal sentencing guidelines range. Joe Nacchio needed to be with his 26 year old son due to his son's problems. The government argued that Nacchio's wife trained in this medical area could adequately address the son's needs. Nottingham pointed out that Nacchio did not seem concerned about his son's needs when Nacchio decided to take the Qwest job and leave his son for four days of the week. Moreover, Nottingham noted that Nacchio did not quit Qwest when his son attempted suicide.

d. Nacchio's counsel also wanted a downward departure for Nacchio's extraordinary charitable works. However, the government argued that he gave only a "paltry" amount as a percent of his annual gross income. The judge noted that Nacchio's charitable giving was consistent with other CEOs and the community's expectations based upon the amount of money Nacchio was pulling out of the community. Consequently, the judge ruled in the government's favor that Nacchio's charitable works were merely ordinary, not extraordinary.

e. The judge made several interesting comments before deciding Nacchio's actual prison sentence. He discussed the importance that Nacchio's sentence be consonant with the "respect for the rule of law." Judge Nottingham referenced the movie "A Man for All Seasons" and in particular the scene where Sir Thomas Moore said that even the devil is entitled to the rule of law; if not, if all the laws are broken to get to the Devil, who will protect us when the Devil comes after us. We protect the Devil for our own security. He also noted that many CEOs made business decisions that crossed the line based upon a cost/benefit analysis where the short term benefit was high and the associated cost was long term and very speculative. The judge wanted to send a message to CEOs that the cost portion of the analysis is indeed high. Consequently, he sentenced Nacchio to a 72 month sentence or six years.

5. The final issue was whether Nacchio could avoid prison pending his appeal. The judge discussed each "substantial question" likely to result in a new trial asserted by Nacchio's counsel. The judge was convinced that these issues were not close questions and ruled that Nacchio had 15 days to surrender to government authorities.

The Sentencing of Joe Nacchio: The Role of Remorse

In seeking a downward revision in his sentence, Joe Nacchio has argued that weight should be given to his good works and the health of his family members.  A post on this approach is here.  He has not argued for a reduction on the basis of remorse.  Kevin O'Brien has posted today on the role remorse can play in determining a sentence.  The post is here. 

Nacchio’s “Remorse” Option to Reduce His Sentence

One effort at a downward adjustment Nacchio is apparently not trying to make is the one based upon “Acceptance of Responsibility” or commonly referred to as “remorse." If Nacchio had shown “remorse,” the resulting two base levels decrease would have reduced his range under the federal sentencing guidelines from 70-87 months to 57-71 months. However, the decrease for remorse is very limited--it appears that Nacchio would not qualify even if he expresses remorse now as shown by the following comment to the “Acceptance of Responsibility” provision under the Federal Sentencing Guidelines:

"This adjustment is not intended to apply to a defendant who puts the government to its burden of proof at trial by denying the essential factual elements of guilt, is convicted, and only then admits guilt and expresses remorse.”

Since Nacchio put the government to its burden of proof at his trial relating to the essential factual elements of insider trading, Nacchio’s attempt to express remorse now would be too late. Regardless, Nacchio probably could not bring himself to accept responsibility because of his belief that he did nothing wrong (especially if Nacchio believes in his own infallibility). His legal counsel will press on appeal that Nacchio was effectively prevented at his trial to present evidence of positive nonpublic information (future secret government contracts) that would have offset the adverse material nonpublic information he might have possessed at the time of selling his Qwest stock.

Sentencing Joe Nacchio and Avoiding the "Mob Scene" at the Courthouse

With the sentencing date quickly approaching (Friday, July 27), the activity is picking up in the case.  Judge Nottingham issued an order rejecting the government's approach to notifying "victims" of the impending hearing, something the defense contended would result in a "mob scene" at the courthouse, and providing time limits on their testimony.  A copy of the order is on the DU Corporate Governance web site. 

Among other things, he rejected the use of court resources to facilitate the notification process.  "Under the Government’s proposal, the persons receiving the notice could then write the clerk of this court requesting, inter alia, the right to be heard at sentencing.. . .  the overall structure of the Act as a whole makes clear that the primary obligation to identify crime victims and give them the notice which is a predicate to the right to be heard resides in the Executive Branch. . . It is therefore up to the Government to identify victims, to notify them, and to coordinate their appearance in court."

He then went on to limit victims to "no more than one and one-half hours at the sentencing hearing."  Moreover, Judge Nottingham rejected the government's expansive definition of victim (something this Blog criticized).  Victims would not include anyone who relied on the false information or Joe Nacchio's actions but only those persons "who bought Qwest shares on the days when Defendant was selling the shares".

It is clear from the order that Judge Nottingham does not intend to have a "mob scene" at the courthouse and will run a tight sentencing hearing.  Although scheduled for eight hours, it is likely, if Judge Nottingham's behavior at the trial is any indication, that this will be over well before 5:00 pm. 

Kevin O'Brien Prognosticates: Judge Notthingham and the Sentencing of Joe Nacchio

As sentencing for Joe Nacchio approaches (July 27), Kevin O'Brien has gone out on a limb and prognosticated about what Judge Nottingham will do.  His post is here. 

Judge Nottingham also issued a Rule of Order for those attending the sentencing (a copy of which will shortly be posted on the DU Corporate Governance web site).  His courtroom has a seating capacity of 210 which is likely to be inadequate for the number of people who will attend.  As a result, Judge Nottingham will, as he did during the trial, provide a second, overflow courtroom that will provide a video feed of the proceedings.  Only the media can use laptops in his courtroom but anyone can bring a laptop to the overflow courtroom for note-taking purposes. 

The set up reflects the growing presence of bloggers.  It allows persons who want to blog the sentencing hearing without having to get a press pass. 

Predicting Notthingham's Sentencing Decision

When Judge Nottingham sentences Joe Nacchio next week (July 27th), the judge will be consulting the federal sentencing guidleines that indicate a range of 70 to 87 months or 5 years/10 months to 7 years/3 months. Nacchio's defense counsel argues three reasons why the range should be less: (1) extraordinary family situation; (2) extraordinary charitable works; and (3) improper calculation of the aggravating circumstance of the insider stock sells. For this third reason, while the Government argues for approximately $44 million Nacchio made in net profit from those sales, Nacchio argues for $1.8 million based upon the amount of the profit actually attributable to material nonpublic information based upon an expert witness. Consequently, whether Judge Nottingham issues a sentence less than 70 months depends upon his legal determination of these issues on their merits.

However, I was also curious whether the past sentencing decision by Judge Nottingham or the past statistics from the US Sentencing Guidelines Commission on the percentage of cases judges departed from the range might aid in predicting the odds of Nottingham going under the range and imposing a sentence less than the prescribed range under the federal sentencing guidelines. Based upon the analysis below, I believe that there is a high probability that Nottingham will stay within the range of 70 to 87 months.

Using Lexis, I searched for court cases involving Judge Nottingham and the sentencing guidelines either where the 10^th Circuit reviewed Nottingham’s sentence (all cases upheld Nottingham’s sentencing decisions) and Nottingham’s opinions for the 10^th Circuit reviewing the sentencing decisions by district court judges. My review of these cases clearly shows a pattern of respectful and consistent adherence to the federal sentencing guidelines. It also shows that Nottingham has consistently applied the aggravating factors (as well as mitigating factors) under the guidelines to increase (or decrease) the sentence when warranted.

For 2006 (after the Booker decision making the guidelines advisory and non-mandatory for judges to follow), the following statistics from the US Sentencing Commission are telling (the source document from the USSG Commission can be found at http://www.ussc.gov/JUDPACK/2005/10c05.pdf Table 8):

Year: 2006                                             National                     Tenth Circuit

                                                            Number        %             Number     %
Total Cases                                             70,187       100             5,974       100

Cases Within Guidelines Range                 43,307     61.7             3,705         62
Government Sponsored Below Range         17,200     24.6                957       25.3

Total Cases Essentially within Range     60,551     86                4,662        87

Cases Above the Range                             1,129      1.6                   82        1.4
Nongovernment Sponsored below Range      8,507     12                   677      11.4

These statistics show the uniformity between the National and 10^th Circuit decisions regarding sentencing and are also consistent with past years. Also, they show the small chance Nottingham will go above the range (1.4%). It also shows how the sentencing decisions are mostly within the range--87%, a very high percentage. In 87% of the cases, the judge essentially decided that there was no “aggravating or mitigating circumstance of a kind, or to a degree, not adequately taken into consideration by the Sentencing Commission in formulating the guidelines …” (18 USC Section 3553).

Joe Nacchio and the Sentencing Guidelines: The Importance of "Gain" on the Insider Trading

Kevin O'Brien has written another thoughtful and thorough post on the application of the sentencing guidelines to Joe Nacchio.  The post is here.  As he notes:  "The central issue in dispute between the government and Nacchio’s attorneys is the proper measurement of: (1) 'gain' on the total increase in value realized for sentencing purposes, and (2) 'proceeds' from the illegal insider trades for forfeiture purposes. I discuss each measurement in detail next."

The Extreme Importance of the Gain on Nacchio’s Insider Trades

Nacchio’s legal counsel has made similar legal arguments to attack the government’s perspective on the appropriate prison term range and on the appropriate amount that Nacchio should forfeit due to the illegal insider trades. These legal arguments can be found for the appropriate sentence by the government in its “United States’ Sentencing Statement” filed on July 6^th, 2007 and by Nacchio’s response to the Presentence Report by the U.S. Department of Probation. Similarly, these legal arguments can be found for the appropriate forfeiture by the government in its Motion for Entry of Money Judgment filed on April 26^th, 2007 and by Nacchio’s Response to Motion of the United States for Entry of Money Judgment.

The stakes are high since if Nacchio wins on both these issues--Nacchio can substantially mitigate the effect of the guilty verdicts on 19 counts as shown by the following table:

                             Government’s Position      Nacchio’s Position

Sentence Range       70 to 87 months               41 to 51 months

Forfeiture                  $52,007,545.47                $1,800,000.00

The central issue in dispute between the government and Nacchio’s attorneys is the proper measurement of: (1) “gain” on the total increase in value realized for sentencing purposes, and (2) “proceeds” from the illegal insider trades for forfeiture purposes. I discuss each measurement in detail next.

Gain and the Federal Sentencing Guidelines:

Gain according to the government for Nacchio’s sentencing range was computed as follows:

Total Sales Price $ 52,007,550

Nacchio’s Cost        7,315,000

Net Gain              $44,692,550

The government’s method results in 17 base levels as opposed to 12 levels using Nacchio’s approach and thus accounts for the material difference in the “Sentence Range” in the above table.

This method is prescribed by the Federal Sentencing Guidelines as interpreted by the Eight Circuit in United States v. Mooney, 425 F.3d 1093, 1100 (8^th Cir. 2005). In Mooney, the Eight Circuit repudiated the “market absorption approach” to calculate a much lower gain directly attributable to the material nonpublic information as measured by the affect disclosure of the information had on the stock price. The Eight Circuit ended its analysis by stating:

The focus in § 2B1.4 [Federal Sentencing Guidelines] on the increase in value realized by the defendant’s trades provides a simple, accurate, and predictable rule for judges to apply and follows the congressional mandate that sentences reflect the seriousness of the offense.

In contrast, Nacchio’s counsel argues that a civil damages model should apply and since Nacchio’s insider trading sales were only inflated by approximately $1.8 million due to the inside information according to his expert, this amount is the limit of his “net gain.” In Naccho’s Response to Motion of the United States for Entry of Money Judgment, the following is offered to describe how Nacchio’s expert determined the $1.8 million:

Professor Fischel has identified four dates following the insider trading period on which disclosures of the material inside information were made, and a fifth date on which an analyst report was published referencing information disclosed on one of the four disclosure dates. An analysis of the effect of these subsequent disclosures on the price of Qwest stock using well known and established techniques in financial economics shows that the portion of Mr. Nacchio’s sales proceeds that can be attributed to inside information and therefore, identified as “ill-gotten” gains, is no more than $1,832,561.

This market absorption approach is not completely without legal merit. In Mooney, there was well reasoned vigorous dissent based on the lack of uniformity that could result in applying the total gain, some of which might not be attributable to the material nonpublic information. Moreover, in the law journal article entitled “Reexamining 'loss' and 'gain' in the wake of Dura Pharmaceuticals v. Broudo -- New Ammunition for Securities Fraud Defendants” (30 Champion 10), the authors provide the following recommendation to legal counsel in Nacchio’s position:

The goal of uniformity in sentencing is clearly undermined by applying the Guidelines in a way that leads to such disparate sentences for defendants who engaged in identical conduct. "Such an application would create a through-the-looking-glass inversion of the Guidelines -- advising unequal sentences for identical crimes -- defeating the chief purpose of the Guidelines." While the "realistic economic approach" adopted in Olis advances the guidelines' goals of uniformity and fairness, the "brightline" rule applied in Mooney sacrifices those goals in favor of expediency.

For all of these reasons, it is difficult to reconcile Mooney with the Fifth Circuit's subsequent holding in Olis, or with the pragmatic approach adopted by the Supreme Court in Dura. Consequently, Mooney should not deter counsel from encouraging sentencing courts, when calculating the gain attributable to insider trading, to apply "thorough analyses grounded in economic reality," aimed at determining the economic impact that the "'defendant truly caused or intended to cause,'" "exclusive of other sources" of impact on the price of the security. (Emphasis added).

Proceeds and the Statutory Forfeiture Provisions

The battle over “proceeds” under the forfeiture provisions is whether direct costs related to the proceeds should be allowed. The government cites United States v. Keeling, 235 F.3d 533 (10 Cir. 2000) for the precedent that the amount subject to forfeiture is the gross amount of the proceeds, not some smaller amount based upon direct costs or net profits. The Tenth Circuit explained that requiring forfeiture of the gross amount was in accord not only with the legislative history and policies undergirding the forfeiture statute, but also with the “purpose of forfeiture,” which “is to remove property facilitating crime or property produced by the crime—all of which is tainted by the illegal activity.” Consequently, Nacchio’s $5.50 per share option cost could not be used to offset the “proceeds” as allowed to determine “gain” for sentencing purposes.

In contrast, Nacchio argues that the defendant in Keeling involved a drug dealer who wanted to offset the “proceeds” by his direct costs in paying his drug supplier for the drugs. The ruling in the Tenth Circuit made public policy sense because the effect of the ruling would be to shut down an illegal business as opposed to Nacchio’s insider trades.

Nacchio cites many cases that appear to allow “net profits” as the measure for the forfeiture provisions. Consequently, not only would Nacchio’s cost of the shares sold of $7,315,000 be allowed as an offset, but his $16,000,000 in withheld income taxes would also be allowed since he never received the total proceeds, only the net of the tax withholdings. Under this approach, Nacchio would have to forfeit $28.6 million after deducting his Qwest stock costs, commissions, and income taxes from his total proceeds of $ 52,007,550.

Finally, similar to numerous civil cases that have held that the amount of illicit gain in an insider trading case is generally the difference between the value of the shares when the insider sold them while in possession of the material, nonpublic information, and their market value a reasonable time after public dissemination of the inside information, Nacchio argues that the best measure is again the market absorption approach determined by his expert of approximately $1,800,000.

As is readily apparent, Judge Nottingham’s decisions on these issues will dramatically affect Nacchio’s level of punishment meted out on July 27^th, 2007. While I believe Nacchio will not prevail on these issues at the trial level, Nacchio’s counsel will have preserved legal issues that can be appealed to the Tenth Circuit.

Joe Nacchio and the Sentencing Guidelines

Kevin O'Brien has provided a detailed analysis of the application of the sentencing guidelines to Joe Nacchio, including a critique of the government's analysis in its recently filed Sentencing Statement.  The post can be found here.  It is a good read.